Sum of all annual net incomes (after depreciation & tax)
Please enter valid positive numbers for Investment and Project Life.
Average Annual Profit:
Average Investment Value:
ARR (Initial Investment Basis):
ARR (Average Investment Basis):
function calculateARR() {
// Get input values
var investInput = document.getElementById("initialInvestment").value;
var scrapInput = document.getElementById("scrapValue").value;
var lifeInput = document.getElementById("projectLife").value;
var profitInput = document.getElementById("totalNetProfit").value;
// Parse values
var initialInvestment = parseFloat(investInput);
var scrapValue = scrapInput === "" ? 0 : parseFloat(scrapInput);
var projectLife = parseFloat(lifeInput);
var totalNetProfit = parseFloat(profitInput);
// Validation
var errorDiv = document.getElementById("errorMsg");
var resultsDiv = document.getElementById("results");
if (isNaN(initialInvestment) || initialInvestment <= 0 ||
isNaN(projectLife) || projectLife <= 0 ||
isNaN(totalNetProfit)) {
errorDiv.style.display = "block";
resultsDiv.style.display = "none";
return;
}
errorDiv.style.display = "none";
// Logic
// 1. Calculate Average Annual Profit
var averageAnnualProfit = totalNetProfit / projectLife;
// 2. Calculate Average Investment
// Formula: (Initial Investment + Scrap Value) / 2
var averageInvestment = (initialInvestment + scrapValue) / 2;
// 3. Calculate ARR (Method 1: Based on Initial Investment)
// Formula: (Avg Annual Profit / Initial Investment) * 100
var arrInitial = (averageAnnualProfit / initialInvestment) * 100;
// 4. Calculate ARR (Method 2: Based on Average Investment)
// Formula: (Avg Annual Profit / Average Investment) * 100
var arrAverage = (averageAnnualProfit / averageInvestment) * 100;
// Formatting Output
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 2
});
document.getElementById("resAvgProfit").innerHTML = formatter.format(averageAnnualProfit);
document.getElementById("resAvgInvest").innerHTML = formatter.format(averageInvestment);
document.getElementById("resArrInitial").innerHTML = arrInitial.toFixed(2) + "%";
document.getElementById("resArrAverage").innerHTML = arrAverage.toFixed(2) + "%";
resultsDiv.style.display = "block";
}
How to Calculate Accounting Rate of Return in Excel
The Accounting Rate of Return (ARR) is a financial ratio used in capital budgeting to measure the potential profitability of an investment. Unlike Net Present Value (NPV), ARR ignores the time value of money, making it a simpler, though less precise, metric for quick comparisons between projects.
This guide explains how to calculate ARR manually and how to build a dynamic ARR calculator in Excel.
The ARR Formula
There are two common ways to calculate ARR. The difference lies in the denominator (the investment base).
Method 1: Based on Initial Investment
This is the simpler version, comparing the average annual return directly against the upfront cost.
This method accounts for the depreciation of the asset over time, assuming the book value declines to the scrap value.
ARR = (Average Annual Profit / Average Investment) × 100
Where:
Average Annual Profit = Total Net Profit / Number of Years
Average Investment = (Initial Investment + Scrap Value) / 2
Step-by-Step: Calculating ARR in Excel
Follow these steps to create a spreadsheet that automatically calculates the Accounting Rate of Return.
1. Set Up Your Data Inputs
Open a blank Excel sheet and define your labels in Column A and your values in Column B.
Cell
Content (Label)
Cell
Content (Example Value)
A1
Initial Investment
B1
50000
A2
Scrap Value
B2
5000
A3
Project Life (Years)
B3
5
A4
Total Net Profit
B4
15000
2. Calculate Intermediate Metrics
Before getting the final percentage, calculate the averages using standard Excel arithmetic formulas.
Average Annual Profit (B6): Type =B4/B3
Average Investment (B7): Type =(B1+B2)/2
3. Calculate Final ARR
Now you can compute the percentage. You can choose either the Initial Investment method or the Average Investment method.
ARR (Initial Basis) in B9: Type =B6/B1
ARR (Average Basis) in B10: Type =B6/B7
Tip: Click on cells B9 and B10 and press the % button in the Excel Home ribbon to format the result as a percentage.
Example Calculation
Let's verify the logic with an example. A company buys a machine for $100,000. It will last 5 years and has a scrap value of $10,000. Over the 5 years, the machine generates a total net profit of $40,000.
Average Annual Profit: $40,000 / 5 = $8,000 per year.
Average Investment: ($100,000 + $10,000) / 2 = $55,000.
ARR (Initial): ($8,000 / $100,000) = 0.08 or 8.00%.
ARR (Average): ($8,000 / $55,000) = 0.1454 or 14.54%.
Important Considerations
When using ARR for investment decisions, keep the following in mind:
Net Profit vs. Cash Flow: ARR typically uses "Net Profit" (which includes depreciation expenses), whereas other metrics like IRR use "Cash Flow". Ensure your input data in Excel matches the definition your company uses.
No Time Value: A dollar earned in Year 5 is treated the same as a dollar earned in Year 1. This is the main weakness of ARR compared to NPV.
Acceptance Criteria: Companies usually have a "hurdle rate." If the ARR is higher than the hurdle rate, the project is acceptable.