The accounting rate of return (ARR) formula is helpful in determining the annual percentage rate of return of a project. ARR is calculated as average annual profit / initial investment. ARR is commonly used when considering multiple projects, as it provides the expected rate of return from each project.
What is the meaning of accounting rate of return?
Definition. The accounting rate of return, also known as the return on investment, gives the annual accounting profits arising from an investment as a percentage of the investment made.
How do you calculate the accounting rate of return for a project?
How to Calculate Accounting Rate of Return
- Calculate the average annual profit of the investment. …
- Subtract the depreciation expense. …
- Divide the annual net profit by the initial cost of the asset. …
- Multiply by 100 to arrive at the percentage rate.
What is a good accounting rate of return?
If the ARR is equal to or greater than the required rate of return, the project is acceptable. If it is less than the desired rate, it should be rejected. When comparing investments, the higher the ARR, the more attractive the investment. More than half of large firms calculate ARR when appraising projects.
What is average rate of return method?
The average rate of return is the average annual amount of cash flow generated over the life of an investment. This rate is calculated by aggregating all expected cash flows and dividing by the number of years that the investment is expected to last.