Accounting Rate of Return (ARR) Formula
The formula to calculate the Accounting Rate of Return (ARR) is:
ARR = (Average Annual Profit / Initial Investment) × 100
Where:
- Average Annual Profit is the net income generated by the investment per year.
- Initial Investment is the total amount of money invested in the project or asset.
Example:
If a business invests $100,000 in a new machine and expects an average annual profit of $20,000 from it, the ARR would be:
ARR = (20,000 / 100,000) × 100 = 20%
This means the business can expect a 20% return on investment annually.
