Work out accounting rate of return instantly with clear inputs, formula shown and shareable results.
Accounting rate of return divides average annual accounting profit — after depreciation — by the investment. Two conventions exist: on initial investment, or on average investment, which is the mean of opening cost and closing residual value and roughly doubles the reported return.
Average investment
Average investment = (Initial investment + Residual value) / 2
ARR
ARR % = Average annual profit / Investment x 100
Because it is designed to align with reported return on capital employed, which is an accruals measure. That also makes it inferior to NPV for investment decisions.
State it explicitly. ARR on average investment is roughly double the initial-investment figure, so comparing the two silently is misleading.