Accounting rate of return (also known as simple rate of return) is the ratio of estimated accounting profit of a project to the average investment made in the. If you have already studied other capital budgeting methods (net present value method, internal rate of return method and payback method), you may have. ARR - the accounting rate of return refers to the amount of net income an asset is expected to generate divided by its initial cost expressed as a percent. ARR may be compared with the target return on investment. The formula for the accounting rate of return is: Cash to be received during the final year. In essence, then, profit is calculated using the accrual basis of accounting, not the cash basis. Balance at the end of year 3. The denominator in the formula is the amount of investment initially required to purchase the asset. The accounting rate of return is computed using the following formula:. ARR is used in investment appraisal. Translation Dictionary Context Conjugation Grammar Spell check Documents and websites translation About Us Contact Newsletter Mobile. ARR is used mainly as a general comparison between multiple projects as it is a very basic look at how a project is doing. What is the definition of accounting rate of return? It ignores those after the end of the recovery period. Accounting Resources questions examples dictionary become a CPA careers. You can also use monthly or even weekly numbers. The payback period is: The accounting rate of return is used in capital budgeting to estimate whether to proceed with an investment. Learn English watching your favourite videos Learn English with movies Learn English with TV shows All English definitions from our dictionary. ARR is used mainly as a general comparison between multiple projects as it is a very basic look at how a project is doing. Related Topics Income Statement Return on Investment Residual Income Internal Rate of Return Profitability Index. Accept the project only if its ARR is equal to or greater than the required accounting rate of return.