Accounting rate of return also known as the Average rate of return (ARR) is the rate obtained by dividing the some measure of average accounting profit by the some measure of average accounting value. AAR is ratio of profit or loss relating to the amount of money invested. ARR of a project is used in capital budgeting decisions but ARR ignore the concept of time value of money
Average net income from project
Average rate of return ( ARR ) = ------------------------------------------------------
Average book value of project
Where ABV is:
Book value at the begging+Book value at the end of useful life
Average book value of project = -------------------------------------------------------------------------------------
2
