Which measure expresses the annual profitability of an investment as a percentage of the initial investment?

The measure that expresses the annual profitability of an investment as a percentage of the initial investment is the average rate of return (ARR). ARR is calculated by taking the average annual profit generated from an investment and dividing it by the initial investment amount, then multiplying by 100 to get a percentage. This measure provides a straightforward indication of how effectively an investment is expected to generate its returns over time compared to the amount initially invested.

In contrast, net present value (NPV) assesses the value of a series of cash flows generated by an investment in today's dollars, factoring in the time value of money, but does not express profitability as a percentage of the initial investment. Similarly, the internal rate of return (IRR) indicates the discount rate at which the net present value of the future cash flows equals zero but does not directly provide annual profitability in percentage terms relative to the initial investment. The payback period focuses solely on how long it will take for an investment to pay back its initial cost, without considering overall profitability or providing a rate of return percentage.