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Accounting Rate of Return
Calculate the Accounting Rate of Return (ARR) on an investment from its average annual profit and initial investment cost.
How to Use Accounting Rate of Return
- 1Enter the average annual profit expected from the investment
- 2Enter the initial investment amount
- 3Click Calculate to see the Accounting Rate of Return
Frequently Asked Questions
ARR uses accounting profit (not cash flow) and ignores the time value of money entirely — a rupee earned in year 1 is treated the same as a rupee earned in year 10. IRR and NPV both discount future cash flows, making them more rigorous for investment decisions.
It's quick and uses figures straight from accounting statements, making it useful for a fast initial screen before running a full discounted cash flow analysis (NPV, IRR, Profitability Index).
The average accounting profit (after depreciation) the investment is expected to generate per year over its useful life — not cash flow, and not a single year's figure if profit varies year to year.
There's no universal threshold — compare it against your company's required/hurdle rate of return, or against ARR figures for competing investment options.
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