
Average accounting return, also called accounting rate of return or ARR, is an accounting method used for the purposes of comparison with other capital budgeting calculations, such as NPV, PB period and IRR.
ARR provides a quick estimate of a project's worth over its useful life. ARR is calculated by finding a capital investment's average operating profits before interest and taxes but after depreciation and amortization (also known as "EBIT") and dividing that number by the book value of the average amount invested. It can be expressed as the following:
ARR = Average Profit / Average Investment
The result is expressed as a percentage. In other words, ARR compares the amount invested to the profits earned over the course of a project's life. The higher the ARR, the better.
The major drawbacks of ARR are as follows:
1. It uses operating profit rather than cash flows. Some capital investments have high upkeep and maintenance costs, which bring down profit levels.
2. Unlike NPV and IRR, it does not account for the time value of money. By ignoring the time value of money, the capital investment under consideration will appear to have a higher level of return than what will occur in reality. The capital investment may appear to be more lucrative than the alternatives, such as investing in the financial markets, when it is actually less lucrative.
Here is a simple example of an ARR calculation: A project requiring an average investment of $1,000,000 and generating an average annual profit of $150,000 would have an ARR of 15%.
While ARR is easy to calculate and can be used to gauge the results of other capital budgeting calculations, it is not the most accurate metric.
Internal Rate Of Return

Small Business
Calculating the Internal Rate of Return Using Excel
The internal rate of return on investments is explained and illustrated in different investment scenarios. 
Small Business
Calculating Net Present Value at Different Points Using Excel
Calculating the net present value (NPV) of your investment projects using Excel. 
Small Business
Capital Budgeting: Which is Better, IRR or NPV?
Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense. 
Small Business
Explaining Cost Of Capital
Cost of capital is the cost of funds used to finance a business. 
Investing
Explaining Capital Employed
Generally, capital employed refers to all of the assets used in a business that contribute to the company’s ability to earn revenue. 
Investing
Key Financial Ratios to Analyze Investment Banks
Find out which financial ratios are most useful when analyzing an investment bank, and why tracking capital efficiency is especially important. 
Small Business
Capital Budgeting
Capital budgeting is a planning process used by companies to evaluate which large projects to invest in, and how to finance them. It is sometimes called “investment appraisal.”