::
Average accounting return is average net profit over average book value.
Average book value is taken by the start and end of the period divided by 2 because it assumes the book value trends from the start value to the end value in a straight line.
So expanding on your example, say across 4 years, profit and book value are:
Year |
Net Profit |
Book Value |
1 |
$ 15,000 |
$ 50,000 |
2 |
$ 25,000 |
$ 35,000 |
3 |
$ 20,000 |
$ 20,000 |
4 |
$ 10,000 |
$ 15,000 |
Return on equity: