function calculateARR() {
// 1. Get input values using var
var initialInvestment = parseFloat(document.getElementById('initialInvestment').value);
var scrapValue = parseFloat(document.getElementById('scrapValue').value);
var totalCashInflow = parseFloat(document.getElementById('totalCashInflow').value);
var usefulLife = parseFloat(document.getElementById('usefulLife').value);
// 2. Validate inputs
if (isNaN(initialInvestment) || initialInvestment < 0) {
alert("Please enter a valid Initial Investment.");
return;
}
if (isNaN(scrapValue) || scrapValue < 0) {
scrapValue = 0; // Default to 0 if empty
}
if (isNaN(totalCashInflow) || totalCashInflow < 0) {
alert("Please enter the Total Estimated Cash Inflow.");
return;
}
if (isNaN(usefulLife) || usefulLife <= 0) {
alert("Please enter a valid Useful Life (greater than 0 years).");
return;
}
// 3. Perform Calculations
// Total Depreciation = Initial Cost – Scrap Value
var totalDepreciation = initialInvestment – scrapValue;
// Total Net Profit = Total Cash Inflow – Total Depreciation
// Note: Some simplified versions use Net Income inputs directly, but deriving it from Cash Inflow is more precise for this tool.
var totalNetProfit = totalCashInflow – totalDepreciation;
// Average Annual Profit = Total Net Profit / Life Years
var averageAnnualProfit = totalNetProfit / usefulLife;
// Average Investment = (Initial Investment + Scrap Value) / 2
var averageInvestment = (initialInvestment + scrapValue) / 2;
// Prevent division by zero
if (averageInvestment === 0) {
alert("Average Investment cannot be zero.");
return;
}
// Unadjusted Rate of Return (ARR) = (Average Annual Profit / Average Investment) * 100
var arrPercentage = (averageAnnualProfit / averageInvestment) * 100;
// 4. Update the DOM
document.getElementById('arrResult').innerHTML = arrPercentage.toFixed(2) + "%";
document.getElementById('avgProfitResult').innerHTML = "$" + averageAnnualProfit.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('avgInvResult').innerHTML = "$" + averageInvestment.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('depreciationResult').innerHTML = "$" + totalDepreciation.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
// Show results
document.getElementById('resultBox').style.display = "block";
}
What is the Unadjusted Rate of Return?
The Unadjusted Rate of Return, commonly referred to as the Accounting Rate of Return (ARR), is a capital budgeting metric used to estimate the profitability of an asset or investment. Unlike more complex metrics like Internal Rate of Return (IRR) or Net Present Value (NPV), the unadjusted rate focuses on accounting profitability rather than cash flow timing.
It calculates the return percentage based on the average annual net income generated by the investment divided by the average capital invested. It is called "unadjusted" because it does not adjust for the time value of money—meaning a dollar earned five years from now is treated as equal to a dollar earned today.
The Formula
The standard formula used in this calculator is:
ARR = (Average Annual Profit / Average Investment) × 100
Where:
Average Annual Profit = (Total Cash Inflows – Total Depreciation) / Useful Life
Average Investment = (Initial Investment + Scrap Value) / 2
Example Calculation
Imagine a manufacturing company plans to buy a new machine. Here are the details:
Despite ignoring the time value of money, the Unadjusted Rate of Return remains popular for several reasons:
Simplicity: It is easy to calculate and understand without complex financial software.
Comparison: It provides a quick way to compare multiple project options against a minimum required rate of return.
Accounting Alignment: Since it uses depreciation and net income, it aligns closely with financial statements and accounting data.
Limitations to Consider
When using this calculator, remember that the Unadjusted Rate of Return does not account for inflation or the timing of cash flows. Projects that return money earlier are generally preferred in finance, but ARR treats early and late returns identically. Therefore, it is best used as a preliminary screening tool alongside NPV or IRR analysis.