Question

In computing the accounting rate-of-return approach (to capital budgeting), will using the initial investment or the average investment give the higher rate of return?

1) Initial investment
2) Average investment

Answer 1

The average investment will give the higher rate of return in the accounting rate-of-return approach to capital budgeting.

Step-by-step explanation:

In computing the accounting rate-of-return approach to capital budgeting, the average investment will give the higher rate of return. The accounting rate-of-return approach calculates the average net income over the life of the investment and divides it by the average investment. This approach takes into account the income generated by the investment each year, which may vary over time. Using the average investment provides a more accurate measure of the rate of return compared to using only the initial investment.