What is accounting rate of return (arr)?

The accounting rate of return (ARR) is a formula that reflects the percentage rate of return expected on an investment or asset, compared to the initial investment's cost. The ARR formula divides an asset's average revenue by the company's initial investment to derive the ratio or return that one may expect over the lifetime of an asset or project.

How do you calculate ARR on an investment?

The ARR on this investment is 0.20 x 100 or 20%. To calculate accounting rate of return requires three steps, figuring the average annual profit increase, then the average investment cost and then apply the ARR formula.

Why do businesses use arr?

Businesses use ARR primarily to compare multiple projects to determine the expected rate of return of each project, or to help decide on an investment or an acquisition. ARR factors in any possible annual expenses, including depreciation, associated with the project.

What is recurring revenue (ARR) & how does it work?

ARR tends to go hand in hand with MRR (monthly recurring revenue) for both SaaS startups and more mature tech businesses. The ARR formula takes into account all of the recurring revenue within your business.