Accounting Rate of Return (ARR)
Evaluating Profitability Using Accounting Income
The Accounting Rate of Return measures the average annual accounting profit generated by an investment relative to the average investment amount.
- Uses accounting income instead of cash flow.
- Simple to compute.
- Does not consider time value of money.
- Useful as a supplementary measure.
Note
ARR should not be the only criterion because accounting profits differ from actual cash flows.
Summary
ARR provides an accounting-based measure of profitability but ignores the timing of cash flows.