Definition of Accounting Rate Of Return

Accounting rate of return (ARR) is a method of finding out the expected amount we will earn from the projects which we have started today and the investment made on the initiation of those projects.


The Formula for ARR:

Formula of Accounting Rate of Return

The ARR formula divides an average net income expected against the average capital cost incurred to derive an expected annual return over the investment or assets. The ARR formula is used to make capital budgeting decisions by managers. Companies use this percentage in deciding on whether or not to invest in a specific project or buying an asset based on the expected return they will earn as compared to the capital cost.

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