When Computing the Accounting Rate of Return for a Capital

question 124

Multiple Choice

When computing the accounting rate of return for a capital asset,which of the following is used as the equation's numerator?

• A)Average annual operating income from the asset
• B)Average amount invested in the asset
• C)Total amount invested in the asset
• D)Average net cash flows from the asset

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Definitions:

Time Value of Money

The concept that money available now is worth more than the same amount in the future due to its potential earning capacity.

Capital Budgeting

The process of planning significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of a new product.

Discounted Cash Flow

A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusting for the time value of money.

Net Present Value

The difference between the present value of cash inflows and outflows over a period of time, used in capital budgeting to assess profitability.