Accounting Rate of Return

 

 

Accounting Rate of Return

Accounting rate of return (ARR) also known as average rate of return is a capital budgeting method used for determining whether it would be beneficial to proceed with a specific project/ investment. In other words, it helps you in calculating the return you would make on your investment. The important thing to note here is that ARR unlike other capital budgeting methods uses profits instead of cash flows. The formula for accounting rate of return is as follows:

ARR = (Average annual accounting profit รท Investment) x 100

 

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