# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Accounting Rate of Return (ARR)

Written By
Paul Tracy
Updated September 30, 2020

What is Accounting Rate of Return (ARR)?

The accounting rate of return (ARR) is a simple estimate of a project's or investment's profitability that subtracts money invested from returns without regard to interest accrual or applicable taxes.

How Does Accounting Rate of Return (ARR) Work?

Also called the "simple rate of return," the accounting rate of return (ARR) allows companies to evaluate the basic viability and profitability of a project based on projected revenue less any money invested. The ARR may be calculated over one or more years of a project's lifespan. If calculated over several years, the averages of investment and revenue are taken.

The ARR itself is derived from dividing the average profit (positive or negative) by the average amount of money invested. For instance, if the annual profit for a given project over a three year span averages $100, and the average investment in a given year is $1000, the ARR would be $100 / $1000 = 10%. 

Why Does Accounting Rate of Return (ARR) Matter?

The ARR should be used as a method for quickly calculating a project's viability, particularly where compared to that of other projects. Nevertheless, the ARR's failure to account for accrued interest, taxation, inflation, and cash flows makes it a poor choice for long-range planning. 

Ask an Expert about Accounting Rate of Return (ARR)
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Accounting Rate of Return (ARR).
Be the first to ask a question

If you have a question about Accounting Rate of Return (ARR), then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Accounting Rate of Return (ARR), then please ask Paul.

Ask a question Read more from Paul

Read this next

Paul Tracy - profile
Ask an Expert about Accounting Rate of Return (ARR)

By submitting this form you agree with our Privacy Policy

Share
close
Don't Know a Financial Term?
Search our library of 4,000+ terms