The capital budgeting method that divides a project's annual incremental net income by the initial investment is the:
A) internal rate of return method.
B) the simple (or accounting)rate of return method.
C) the payback method.
D) the net present value method.

Question

Quizplus · Accepted Answer

The method described in the question is the simple (or accounting) rate of return method. It calculates the annual incremental net income that a project will generate and divides it by the initial investment to calculate the percentage return on investment. This method does not consider the time value of money and is less sophisticated than other capital budgeting methods, such as the net present value method or internal rate of return method. However, it can provide a quick and easy way to evaluate the profitability of a project, especially for smaller projects or those with shorter lifetimes.

The Capital Budgeting Method That Divides a Project's Annual Incremental