💼 Want a quick way to see if an investment is worth it? That’s where ARR, or Accounting Rate of Return, steps in.
ARR tells you how much return you can expect per year based on your accounting profits. It’s super useful when you’re comparing different investment options or deciding whether to move forward on a project.
Let’s break it down with simple examples and a calculator.
Table of Contents
🙋 What is ARR?
ARR (Accounting Rate of Return) shows the average annual profit you expect to make from an investment, as a percentage of the money you originally spent.
You might hear it called Return on Investment (ROI) in some cases, but ARR focuses on accounting profits — not cash flow or payback periods.
🧮 ARR Formula
Here’s the simple formula:
ARR = (Average Annual Accounting Profit / Initial Investment) × 100
Where:
- Average Annual Profit is your expected profit each year (after depreciation & other accounting costs)
- Initial Investment is the total cost to get the project started
✅ Example
Imagine you invest $20,000 in new equipment and expect it to generate $4,000 in profit each year.
ARR = (4,000 / 20,000) × 100 = 20%
So, your accounting return is 20% per year. Not bad!
📘 Final Thoughts
ARR is perfect for quick comparisons when you’re deciding between two or more projects. It’s especially helpful if you want a fast estimate without diving into deeper financial models like NPV or IRR.
✅ Use ARR when:
- You need to compare simple projects
- You want to know the return on your accounting books
- You want a fast "go or no-go" decision
Just remember — ARR doesn’t consider the time value of money, so it’s best used with other tools if you’re making a big investment.