What financial metric accounts for profit relative to capital costs?

The correct answer is the Accounting Rate of Return, which measures the profit generated from an investment relative to its cost. This metric is important for assessing the efficiency of an investment since it provides a straightforward percentage that indicates how well the capital employed is performing in generating profit.

The Accounting Rate of Return is calculated by taking the average annual profit from an investment and dividing it by the initial capital outlay. By expressing profit as a percentage of the capital invested, this metric allows stakeholders to compare different investment opportunities easily.

While other metrics may also relate to profit and capital, they operate in different contexts. For example, Net Present Value focuses on the total value generated over time, considering the time value of money, rather than just comparing profit to initial investment costs directly. Residual Income, on the other hand, calculates the net income above a minimum required return on investments. Return on Investment expresses the percentage gain or loss on an investment but does not emphasize average annual profits. Thus, Accounting Rate of Return is the most direct measure of profit relative to capital costs.