Accounting rate of return (arr), Financial Management

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Accounting Rate of Return (ARR):

This technique relies on the rate of return every project will earn over its life. It takes the help of accounting profit while calculating the returns.  There are 2 methods of calculating ARR.

(i)                 On the basis of original investment,

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This technique of calculation was rejected on the ground that the original outlay is gradually recovered over the project life because of depreciation charge.

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When depreciation is to be taken on a straight-line basis and no salvage value is understood, the average investment is always equal to one-half of the original in- vestment, and the resulting rate of return is always two times the rate determined on the basis of original investment.

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