What is the accounting rate of return for Project 2?

To determine the accounting rate of return (ARR) for Project 2, it is essential first to understand the formula used to calculate ARR. The accounting rate of return is found by dividing the average annual profit from the project by the initial investment required for the project, then expressing that figure as a percentage.

In this context, if you have already calculated the average annual profit and know the initial investment amount for Project 2, you would apply these figures into the ARR formula. For instance, if the average annual profit is calculated to be 2.33% of the investment, then this value signifies that the project is expected to yield that percentage of the investment as profit annually.

This approach allows project managers and stakeholders to evaluate the profitability of the investment compared to other potential projects or benchmarks. A 2.33% ARR indicates that Project 2 returns a reasonable but modest profit relative to its costs.

The ARR provides useful insight into potential investment decisions based on how well a project can generate returns relative to its costs, making it a vital metric in capital budgeting processes. Being well understood in this way is crucial for financial analysis and decision-making.