Monday, 20 August 2018

Accounting Rate of Return or Average Rate of Return (ARR)

Accounting Rate of Return or Average Rate of Return (ARR)
  • a financial ratio used in capital budgeting
  • does not take into account the concept of time value of money
  • calculates the return generated from net income of the proposed capital investment.

1.  Investment without scrap value

Depreciation = Total Investment / Useful Life

ARR = [(Average Cash Flow - Depreciation) / Initial Investment] x 100%


2.  Investment with a scrap value

Depreciation = (Total Investment - Scrap Value) / Useful Life

ARR = [(Average Cash Flow - Depreciation) / Initial Investment] x 100%

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