Quick Definition

The Accounting Rate of Return (ARR) is a financial metric used to measure the expected profitability of an investment, calculated by dividing the average annual profit by the initial investment cost.

Formula

Examples

• 1A company invests $500,000 in new machinery and expects an average annual profit increase of $100,000. The ARR would be 20%.
• 2A real estate investment of $200,000 is projected to generate an additional $25,000 per year in rental income, resulting in an ARR of 12.5%.
• 3A business upgrades its IT systems for $50,000, anticipating an increase in efficiency that will lead to an extra $10,000 in profits annually, giving an ARR of 20%.

Tags