Accounting rate of return method or arr, Finance Basics

Accounting Rate of Return Method or ARR

This method utilizes accounting profits from financial status to assess the viability of investment proposal via diving the average income after tax via average investment.  The investment would be equivalent to the original investment in addition the salvage value divided with two or the initial investment divided with two or dividing the total of the investment book value after depreciating with the life of the project.  This method is known as also book value method or financial statement method.  The rate of return on asset method or adjusted rate of return method is given via:

ARR = ( Average income/ Average investment)    x 100 

or (Average income - Average depreciation)/Initial investment

Not like PBP, this method will ascertain the profitability of an investment and it will provide results that are consistent along with those given via return ratios.

Posted Date: 1/30/2013 5:06:19 AM | Location : United States

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