Definition

The Accounting Rate of Return (ARR) is a financial metric used to measure the profitability of an investment. It is calculated by dividing the average annual profit by the initial investment cost. The resulting percentage is the ARR, which is used to compare the profitability of different investments.

 

Importance

The ARR is an important metric for businesses to consider when making investment decisions. It provides a quick and easy way to compare the profitability of different investments and helps businesses determine which investments are most likely to generate a return.

 

Example

For example, if a business invests $100,000 in a new project and expects to generate an average annual profit of $20,000, the ARR would be 20%. This means that the business can expect to earn a 20% return on its investment.

 

Table

Investment Cost $100,000

Average Annual Profit $20,000

ARR 20%

 

Key Takeaways

 

Conclusion

The Accounting Rate of Return (ARR) is a useful metric for businesses to consider when making investment decisions. It provides a quick and easy way to compare the profitability of different investments and helps businesses determine which investments are most likely to generate a return. By understanding the ARR, businesses can make more informed decisions and maximize their return on investment.