The Average Rate of Return (ARR) is a profitability metric used to estimate the average annual profit an investment is expected to generate over its lifespan. It's a straightforward way to assess the potential return of an investment without considering the time value of money, making it a useful tool for quick comparisons.
Understanding Average Rate of Return (ARR)
The Average Rate of Return (ARR) is a simple yet effective measure to gauge the profitability of an investment over a specific period. It helps in understanding how much return, on average, you can expect to receive each year from your initial investment.
Formula:
The formula for calculating the Average Rate of Return is:
Total Profits is the sum of all profits generated by the investment over its entire duration.
Initial Investment is the original amount of money invested.
Investment Lifespan is the number of years the investment is held.
ARR is often expressed as a percentage. A higher ARR generally indicates a more profitable investment. It's important to note that ARR does not account for the timing of cash flows or the risk associated with the investment, so it should be used in conjunction with other financial metrics for a comprehensive analysis.
When to Use ARR:
For initial screening of potential investments.
When comparing investments with similar lifespans and risk profiles.
For simpler investment scenarios where detailed cash flow analysis might be overkill.
function calculateARR() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var totalProfits = parseFloat(document.getElementById("totalProfits").value);
var investmentLifespan = parseFloat(document.getElementById("investmentLifespan").value);
var resultDiv = document.getElementById("result");
if (isNaN(initialInvestment) || isNaN(totalProfits) || isNaN(investmentLifespan)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (initialInvestment <= 0) {
resultDiv.innerHTML = "Initial Investment must be greater than zero.";
return;
}
if (investmentLifespan <= 0) {
resultDiv.innerHTML = "Investment Lifespan must be greater than zero.";
return;
}
var averageAnnualProfit = totalProfits / investmentLifespan;
var arr = (averageAnnualProfit / initialInvestment) * 100;
resultDiv.innerHTML = "