The Formula to Calculate the Accounting Rate of Return Is:

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Understanding the Accounting Rate of Return (ARR)

The Accounting Rate of Return (ARR), also known as the Average Rate of Return, is a financial metric used to estimate the profitability of an investment over its useful life. It measures the expected annual profit as a percentage of the initial investment. ARR is a simple and straightforward method for evaluating capital budgeting decisions, but it does not consider the time value of money.

The formula for ARR is:

ARR = (Average Annual Profit / Initial Investment) * 100

To calculate the Average Annual Profit, you first need to determine the total profit over the life of the asset and then divide it by the number of years the asset is expected to be in service. The initial investment is the total cost incurred to acquire the asset.

Average Annual Profit = (Total Profit / Useful Life in Years)

Total Profit = Total Revenue – Total Expenses – Initial Investment

ARR is useful because it provides a clear percentage return, making it easy to compare different investment opportunities. However, its main drawback is that it ignores the timing of cash flows and the discount rate.

Accounting Rate of Return Calculator

.calculator-container { display: flex; flex-wrap: wrap; gap: 20px; font-family: sans-serif; } .article-content { flex: 1; min-width: 300px; } .calculator-form { flex: 1; min-width: 300px; border: 1px solid #ccc; padding: 20px; border-radius: 8px; background-color: #f9f9f9; } .input-group { margin-bottom: 15px; } .input-group label { display: block; margin-bottom: 5px; font-weight: bold; } .input-group input { width: calc(100% – 12px); padding: 8px; border: 1px solid #ccc; border-radius: 4px; } .calculator-form button { background-color: #4CAF50; color: white; padding: 10px 15px; border: none; border-radius: 4px; cursor: pointer; font-size: 16px; } .calculator-form button:hover { background-color: #45a049; } #result { margin-top: 20px; font-weight: bold; font-size: 1.1em; color: #333; } function calculateARR() { var initialInvestment = parseFloat(document.getElementById("initialInvestment").value); var totalRevenue = parseFloat(document.getElementById("totalRevenue").value); var totalExpenses = parseFloat(document.getElementById("totalExpenses").value); var usefulLife = parseFloat(document.getElementById("usefulLife").value); var resultDiv = document.getElementById("result"); resultDiv.innerHTML = ""; if (isNaN(initialInvestment) || initialInvestment <= 0) { resultDiv.innerHTML = "Please enter a valid positive initial investment."; return; } if (isNaN(totalRevenue) || totalRevenue < 0) { resultDiv.innerHTML = "Please enter a valid non-negative total revenue."; return; } if (isNaN(totalExpenses) || totalExpenses < 0) { resultDiv.innerHTML = "Please enter a valid non-negative total expenses."; return; } if (isNaN(usefulLife) || usefulLife <= 0) { resultDiv.innerHTML = "Please enter a valid positive useful life in years."; return; } var totalProfit = totalRevenue – totalExpenses – initialInvestment; var averageAnnualProfit = totalProfit / usefulLife; // Ensure average annual profit isn't negative before calculating ARR percentage if (averageAnnualProfit < 0) { averageAnnualProfit = 0; // Or handle as a negative ARR if business logic dictates } var arr = (averageAnnualProfit / initialInvestment) * 100; resultDiv.innerHTML = "Accounting Rate of Return (ARR): " + arr.toFixed(2) + "%"; }

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