To calculate the average rate of return (ARR), which two figures are primarily used?

The average rate of return (ARR) is a financial metric used to evaluate the profitability of an investment over a specified period. To calculate ARR, the primary figures used are the annual profit generated from the investment and the initial investment amount.

The annual profit is critical because it represents the return generated by the investment each year after subtracting all costs and expenses. The initial investment figure is equally important as it serves as the baseline against which the return is measured. By dividing the annual profit by the initial investment, you can derive the ARR, which provides a percentage that represents the efficiency and profitability of the investment relative to its cost. This figure is valuable for making informed investment decisions, comparing different investment opportunities, and assessing the financial performance of business strategies.

Other options do not apply as directly to the ARR calculation. Total assets and liabilities pertain more to a company's balance sheet rather than investment profitability. Cash flows and operating expenses could be relevant for other analyses like cash flow statements but are not used for calculating ARR. Gross revenue and net profit focus more on the top line and earnings outcomes without considering the specific investment context like annual profit does.