Question

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

Answer 1

accounting rate of return = Average annual profit after tax / average investment , where average investment is 1/2 of initial cost and salvage value. Accounting rate of return is measured on the basis of accounting profit after depreciation and tax rather than the discounted cash flow of investment

return on investment = net income / Total investment , this formula shows the percentage of benefit or income that will be received by investor in relation to his investment cost during the period