The most important methods of capital budgeting are:1. Accounting rate of return2. Refund period3. Profitability index4. Net present value5. Internal Rate of Return The accounting rate of return is the rate of return on the net income of the proposed capital investment. Formula The accounting rate of return is calculated using the following formula: ARR = Average Accounting Profit Average Investment Average Accounting Profit is the arithmetic mean of the expected accounting income during each year of the project's life. The average investment can be calculated as the sum of the starting and ending book value of the project divided by 2. Another variation of the ARR formula uses the starting investment instead of the average investment. (Capital budget) arrExamplesExample 1: An initial investment of $130,000 is expected to generate an annual cash flow of $32,000 for 6 years. Depreciation is allowed on a straight-line basis. The project is estimated to generate $10,500 in waste value at the end of the sixth year. Calculate the accounting rate of return assuming there are no other expenses in the project.