function calculateARR() {
// Get input values
var initialInvestment = parseFloat(document.getElementById('initialInvestment').value);
var scrapValue = parseFloat(document.getElementById('scrapValue').value);
var totalNetIncome = parseFloat(document.getElementById('totalNetIncome').value);
var usefulLife = parseFloat(document.getElementById('usefulLife').value);
// Handle Scrap Value being empty
if (isNaN(scrapValue)) {
scrapValue = 0;
}
// Validation
if (isNaN(initialInvestment) || initialInvestment <= 0) {
alert("Please enter a valid Initial Investment amount.");
return;
}
if (isNaN(totalNetIncome)) {
alert("Please enter a valid Total Net Income.");
return;
}
if (isNaN(usefulLife) || usefulLife <= 0) {
alert("Please enter a valid Useful Life in years.");
return;
}
// Logic:
// 1. Calculate Average Annual Profit
var avgAnnualProfit = totalNetIncome / usefulLife;
// 2. Calculate Average Investment
// Formula: (Initial Investment + Scrap Value) / 2
var avgInvestment = (initialInvestment + scrapValue) / 2;
// 3. Calculate ARR
// Formula: (Average Annual Profit / Average Investment) * 100
var arr = (avgAnnualProfit / avgInvestment) * 100;
// Display Results
document.getElementById('avgProfitResult').innerHTML = "$" + avgAnnualProfit.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('avgInvestResult').innerHTML = "$" + avgInvestment.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('arrResult').innerHTML = arr.toFixed(2) + "%";
document.getElementById('result').style.display = "block";
}
Understanding How the Accounting Rate of Return is Calculated As
The Accounting Rate of Return (ARR) is a financial ratio used in capital budgeting. It reflects the percentage return expected on a new investment or asset compared to the initial capital cost. Unlike other valuation methods like NPV (Net Present Value), ARR focuses on the profitability of the investment based on accounting information rather than cash flow.
Generally, the accounting rate of return is calculated as the average annual accounting profit divided by the average investment, expressed as a percentage. This metric allows managers to evaluate the potential profitability of an asset over its useful life.
The ARR Formula
While there are slight variations in the formula depending on whether you use the initial investment or the average investment, the most common standard method used by financial analysts is the Average Investment Method.
Knowing how the accounting rate of return is calculated as a percentage helps businesses make quick decisions. If the calculated ARR is higher than the company's required minimum rate of return, the project is generally accepted. It is particularly useful for comparing multiple projects to see which one offers the best return on the book value of the investment.
Limitations of ARR
While simple to use, the ARR method has limitations. It does not account for the time value of money, meaning a dollar earned today is treated the same as a dollar earned five years from now. Additionally, it relies on accounting profits (which include non-cash expenses like depreciation) rather than actual cash flows.