Question

how does the accounting rate of return differ from the return on investment formula? multiple choice they are not different; both are calculated by dividing net operating income by initial investment. the numerator in each formula differs; accounting rate of return divides net operating income by initial investment, and return on investment divides gross operating income by initial investment. the numerator in each formula differs; accounting rate of return divides net operating income by average invested assets, while return on investment divides gross operating income by average invested assets. the denominator in each formula differs; accounting rate of return divides net operating income by initial investment, while return on investment divides net operating income by average invested assets.

Answer 1

The accounting rate of return divides net operating income by average invested assets, while the return on investment divides net operating income or net profit by the initial investment.

Step-by-step explanation:

How does the accounting rate of return differ from the return on investment formula?

The key difference relates to the denominator in each formula. The accounting rate of return (ARR) divides net operating income by the average invested assets, which represents the average of the initial investment and the value at the end of the investment’s life. On the other hand, the return on investment (ROI) typically divides net operating income or net profit by the initial investment cost. It is important to note that both these ratios are used to evaluate the profitability and performance of an investment, but they look at the investment's efficiency from slightly different perspectives. ARR is concerned with the return over the asset's useful life, while ROI focuses on the return relative to the initial cost.