Accounting Rate of Return

The accounting rate of return (ARR) is a financial metric used to assess the profitability of an investment based on the expected increase in accounting profits. It is calculated by dividing the average annual accounting profit from an investment by the initial cost of the investment, and it is expressed as a percentage. Unlike other return measures, the ARR does not account for the time value of money, making it a simpler but less precise tool for evaluating investment opportunities. ARR is often used in capital budgeting to compare the profitability of different investments or projects.

Example

If a company invests $100,000 in a project expected to generate $20,000 in average annual profit, the ARR would be 20% ($20,000 ÷ $100,000).