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%