Final answer:
The correct answer to the question is D, accounting rate of return (ARR). ARR is calculated by dividing a project's average net income by its average book value, and it is used to assess the profitability of a project without accounting for the time value of money, unlike other metrics such as NPV or IRR.
Step-by-step explanation:
The question relates to how to measure the profitability of a project by using different financial metrics. The average net income divided by its average book value is referred to as the project's accounting rate of return (ARR). This is option D in the given choices. ARR is a simple measure that looks at the profits of a project compared to its average book value to gauge its performance over time.
The accounting profit is calculated as total revenues minus explicit costs, including depreciation. When we talk about the average profit, it represents the profit divided by the quantity of output produced, also known as profit margin. On the other hand, the average total cost is the total cost divided by the quantity of output.
The concept of expected rate of return refers to the projection of what an investment or project should yield for the investor over time. It's a different metric which incorporates the time value of money and is associated with net present value and internal rate of return calculations, rather than with ARR. The ARR is used for its simplicity and does not take the time value of money into account, unlike other financial measures such as net present value (NPV) or internal rate of return (IRR). Therefore, when we consider the average net income divided by the average book value, the correct answer is D, the accounting rate of return.