What is the accounting rate of return?
The accounting rate of return (ARR) is a tool for a capital budget used to measure profit or profit that an investor or company can expect from a capital project or investment. It is the ratio of the total expected annual income or profit to investment costs. The ratio is multiplied by 100 to express this number as a percentage. The higher the ARR, the more attractive the investment option could be. Investors can set a scale for the investment to deserve to be considered. For example, they may set an acceptable return rate of 30%, which means that an investment option that will provide a financial return equal to or more than 30%
are two ways of calculating this number - the original investment method and the average investment method. The original investment method distributes income or profit expected to be obtained during the project life of a total capital investment in a project or so -called. Original investment - revenue/original investment costs. The average investment method distributes the average influx or income expected from the project by the average investment costs in the project - average income/average investment costs. The division of the original investment by two or by a number, which is the center between the original investment costs and its rescue value, will bring the average investment costs to be used as the denominator in the ARR calculation using an average investment method.
Expected income or profit from an investment reflected as a numerator at an accounting rate of return on taxes, income after tax and depreciation, income before tax and depreciation or income before depreciation and tax. These four ways of representing the expected income along with the two methods used in the calculation. The return will significantly affect the result of the calculation of the ratio. In order to maintain a comparison of two or more capital investments to apples, caution must be adequate in the constant use of the sameformulas for each project compared.