The Formula to Calculate the Accounting Rate of Return is

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Accounting Rate of Return Calculator

What is the Accounting Rate of Return (ARR)?

The Accounting Rate of Return (ARR) is a profitability metric used to evaluate the potential return of an investment. It measures the average accounting profit that an investment is expected to generate relative to its initial cost. Unlike cash flow-based metrics, ARR uses accounting profit, which includes non-cash expenses like depreciation but is net of taxes. It's a simple way to assess the efficiency of an asset or project.

How to Calculate ARR:

The formula for the Accounting Rate of Return is:

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

Where:

  • Initial Investment Cost: The total upfront cost to acquire the asset or start the project.
  • Average Annual Profit: The expected profit generated by the investment each year, after accounting for all operating expenses, depreciation, and taxes.

A higher ARR generally indicates a more profitable investment. It's often used as a quick screening tool to compare different investment opportunities. However, it doesn't consider the time value of money, which is a significant limitation compared to methods like Net Present Value (NPV) or Internal Rate of Return (IRR).

Example:

Let's say a company is considering purchasing a new machine.

  • The initial cost of the machine is $50,000.
  • The machine is expected to generate an average annual profit of $10,000 (after depreciation and taxes).

Using the ARR formula:

ARR = ($10,000 / $50,000) * 100% = 0.20 * 100% = 20%

This means the investment is expected to yield a 20% accounting return annually.

function calculateARR() { var initialInvestment = parseFloat(document.getElementById("initialInvestment").value); var annualProfit = parseFloat(document.getElementById("annualProfit").value); var resultDiv = document.getElementById("result"); if (isNaN(initialInvestment) || isNaN(annualProfit) || initialInvestment <= 0) { resultDiv.innerHTML = "Please enter valid positive numbers for both initial investment and annual profit."; return; } var arr = (annualProfit / initialInvestment) * 100; resultDiv.innerHTML = "

Result

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