A hospital evaluates an ambulance investment: cost $100,000, depreciation $20,000 per year for five years, and annual reimbursements $45,000. What is the accounting rate of return on this investment?

• A. 20%
• B. 25%
• C. 45%
• D. 100%

Answer: (B)

Accounting rate of return measures the ratio of average annual accounting profit to the initial investment. Here, each year the ambulance brings in reimbursements of 45,000, and depreciation is 20,000, so the annual accounting profit is 25,000. With an initial investment of 100,000, ARR = 25,000 / 100,000 = 0.25, or 25%. So the best answer is 25%. This uses accounting profit (which includes depreciation as a non-cash expense) rather than cash flow, aligning with how ARR is defined.