An investment appraisal technique that calculates the average annual profit of an investment project; expresses as a percentage of the initial sum invested.

• A. Accounting Rate of Return
• B. Net Present Value
• C. Payback Period
• D. Qualitative Investment Appraisal

Answer: (A)

This question tests your understanding of a simple profitability measure that relates the average annual accounting profit to the initial outlay. The technique that does this is the Accounting Rate of Return. It takes the average profit an investment earns each year (using accounting profits, which include depreciation) and expresses it as a percentage of the initial investment. ARR = (average annual accounting profit / initial investment) × 100.

Why this fits: it specifically yields a percentage of the initial sum invested, focusing on profitability rather than cash flow or timing. It’s a straightforward, easy-to-remember metric, though it has limitations, such as ignoring the time value of money and relying on accounting profits rather than cash flows.

Why the others don’t fit: Net Present Value measures the present value of expected cash flows and is not expressed as a percentage of the initial outlay. Payback Period tells you how long it takes to recover the original investment, not the annual return expressed as a percentage. Qualitative Investment Appraisal covers non-financial factors, not a numeric profitability percentage.