Which measurement expresses profitability as a percentage of the initial investment?

• A. Accounting Rate of Return
• B. Net Present Value
• C. Payback Period
• D. Cash Flow

Answer: (A)

Profitability expressed as a percentage of the initial investment is shown by the Accounting Rate of Return. ARR converts the profits earned each year into a rate relative to what was invested, giving a percentage return. In practice, it is calculated as average annual accounting profit divided by the initial investment (or average investment), then multiplied by 100. This yields a percent figure that’s easy to compare with a required return.

Cash flow, payback period, and net present value operate differently: net present value is a currency amount reflecting discounted cash inflows minus outflows; payback period measures the time needed to recover the initial outlay; cash flow is the actual cash in and out, not a profitability ratio. The ARR’s strength is in presenting profitability as a simple percentage of the investment, even though it has limitations like not accounting for the time value of money.