what is accounting rate of return arr 
the accounting rate of return is a capital budgeting metric to calculate an investment s profitability businesses use arr to compare multiple projects to determine each endeavor s expected rate of return or to help decide on an investment or an acquisition 1the accounting rate of return arr formula divides an asset s average revenue by the company s initial investment to derive the ratio or return generated from the net income of the proposed capital investment investopedia dennis madambacalculating arra r r a v e r a g e a n n u a l p r o f i t i n i t i a l i n v e s t m e n t arr frac average annual profit initial investment arr initialinvestmentaverageannualprofit examplea business is considering a project with an initial investment of 250 000 and forecasts it will generate revenue for the next five years arr is calculated as advantages and disadvantages of arrthe accounting rate of return is a simple calculation that does not require complex math and allows managers to compare arr to the desired minimum required return for example if the minimum required return of a project is 12 and arr is 9 a manager will know not to proceed with the project however arr does not consider the time value of money or cash flows the time value of money is the concept that money available at present is worth more than an identical sum in the future because of its potential earning capacity arr does not assign a higher value to a project that returns profits sooner the accounting rate of return does not consider the increased risk of long term projects and the increased uncertainty associated with long periods determines a project s annual rate of returnsimple comparison to minimum rate of returnease of use