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Trading and Investment Terms

Accounting rate of return

It is also known as the Average rate of return.

ARR is a financial ratio used in capital budgeting.

By dividing the net income from an investment by the total amount invested in obtaining the ARR.

It means, if your business needs to decide whether to continue with a particular investment, whether it’s a project or an acquisition, an ARR calculation can help to determine whether going ahead is the right move. 

For Example:

  • If the annual profit for a project over the life of the investment averages to Rs. 20,000, and the average investment value in a given year is Rs. 100,000, then ARR would be calculated as below:

20000 / 100000 = 20% is the ARR

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