measure of profitability obtained by dividing the expected future annual net income by the required investment; also called accounting rate of return or unadjusted rate of return. Sometimes the average investment rather than the original initial investment is used as the required investment, which is called average rate of return. For example, consider the following investment:
Then the simple rate of return is $675/$6500 = 10.4%. Using the average investment, which is usually assumed to be one-half of the original investment, the average rate of return will be doubled as follows:
rate of return that results from dividing the income and capital gains from an investment by the amount of capital invested. For example, if a $1,000 investment produced $50 in income and $50 in capital appreciation in one year, the investment would have a 10% simple rate of return. This method of calculation does not factor in the effects of compounding.
rate of return that results from dividing the income and capital gains from an investment by the amount of capital invested. For example, if a $1,000 investment produced $50 in income and $50 in capital appreciation in one year, the investment would have a 10% simple rate of return. This method of calculation does not factor in the effects of compounding.
| $675 $6500/2 | = | $675 $3250 | × | = 20.8% |
