Showing posts with label Average Rate of Return. Show all posts
Showing posts with label Average Rate of Return. Show all posts

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%