The Accounting Rate of Return (ARR) measures the average profit as a percentage of the capital investment. It is used in investment appraisal, where projects must meet a defined minimum ARR for acceptance, with higher ARR values being more desirable. To calculate ARR, divide the annual net profit by the initial investment cost and convert the decimal result into a percentage.

1. ARR
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2. • Accounting Rate of Return (ARR) expresses the
average profit per annum as a percentage of
the capital outlay. The decision rule (criterion
rate) is that projects with an ARR above a
defined minimum as set by the organisation
are acceptable; however the general rule is
that the greater the ARR, the more desirable
the project.

3. Definition
• Accounting rate of return (also known as
simple rate of return) is the ratio of estimated
accounting profit of a project to the average
investment made in the project. ARR is used in
investment appraisal.

4. Calculation ARR
• Calculate the annual net profit from the investment,
which could include revenue minus any annual costs or
expenses of implementing the project or investment.
• If the investment is a fixed asset such as property,
plant, or equipment, subtract any depreciation expense
from the annual revenue to achieve the annual net
profit.
• Divide the annual net profit by the initial cost of the
asset, or investment. The result of the calculation will
yield a decimal. Multiply the result by 100 to show the
percentage return as a whole number.