What is average accounting return?

A measure of returns over the life of an investment. It is calculated by taking the average net profit ( earnings minus taxes and depreciation) and dividing it by the average book value of the investment over its life. The average accounting return is used to determine how efficiently assets are used to produce a profit.

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 accounting rate of return?

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. To arrive at a figure for the average annual profit increase, analysts project the estimated increase in annual revenues the investment will provide over its useful life.

Does accounting rate of return include cash flow?

Different investments may involve different time periods, which can change the overall value proposition. Unlike other widely used return measures, such as net present value and internal rate of return, accounting rate of return does not consider the cash flow an investment will generate.