Final answer:
The Accounting Rate of Return (ARR) is the average annual profit divided by the average investment. It indicates the annual percentage return from an investment, and in response to the question, the correct formula is d. Income/Investment.
Step-by-step explanation:
The Accounting Rate of Return (ARR) is a financial ratio used in capital budgeting to estimate the profitability of potential investments. The ARR is calculated by dividing the average annual profit (or income) by the average investment. This figure represents the return an investor can expect on the funds invested in a project or asset. A major component of 'income' in this context is not just the revenue but also involves deducting expenses so that we arrive at a net profit figure.
Let's look at the simplest example of a rate of return, which is the interest rate. When you deposit money into a savings account, the bank pays you interest as a percentage of your deposits. This is analogous to ARR in that it measures the return on investment over a period. In terms of capital investment, ARR might consider both the increase in value of the original investment (akin to capital gains) and the income it generates over time, such as dividends or profit from operations.
To answer the student's question directly: the accounting rate of return is calculated as d. Income/Investment. This is because ARR is designed to show the annual percentage return on an investment, taking the average net income and dividing it by the initial cost of the investment or the average investment over the period.