Calculate The ARR

ARR Formula:

\[ ARR = \frac{\text{Average Annual Profit}}{\text{Initial Investment}} \times 100\% \]

ARR (%):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is the ARR?

The Accounting Rate of Return (ARR) is a financial ratio used in capital budgeting to measure the profitability of an investment. It calculates the expected percentage return from an investment based on accounting information rather than cash flows.

2. How Does the Calculator Work?

The calculator uses the ARR formula:

\[ ARR = \frac{\text{Average Annual Profit}}{\text{Initial Investment}} \times 100\% \]

Where:

Average Annual Profit — The average annual net profit generated by the investment
Initial Investment — The total initial capital invested

Explanation: The ARR provides a simple percentage return that helps compare different investment opportunities based on their accounting profitability.

3. Importance of ARR Calculation

Details: ARR is widely used in business decision-making because it's easy to calculate and understand. It helps managers evaluate investment projects and compare them against required rates of return or other investment opportunities.

4. Using the Calculator

Tips: Enter the average annual profit and initial investment in dollars. Both values must be positive numbers, with initial investment greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ARR value?
A: A good ARR depends on the industry and company's required rate of return. Generally, higher ARR values indicate better investment opportunities.

Q2: What are the limitations of ARR?
A: ARR ignores the time value of money, doesn't consider cash flow timing, and uses accounting profits rather than cash flows, which can be manipulated.

Q3: How does ARR differ from ROI?
A: While both measure profitability, ARR focuses on accounting profits and annual returns, while ROI (Return on Investment) can be calculated for different time periods and may use different profit measures.

Q4: When should ARR be used?
A: ARR is best used for quick preliminary screening of investment projects or when comparing projects with similar characteristics and timeframes.

Q5: Does ARR consider the project's lifespan?
A: ARR indirectly considers lifespan through the average annual profit calculation, but it doesn't explicitly account for the time value of money over different project durations.