The formula to calculate the Accounting Rate of Return (ARR) is:
\[ ARR = \left( \frac{RP}{YOI} \right) \div \left( \frac{IV + WC + SV}{2} \right) \times 100 \]
Where:
The Accounting Rate of Return (ARR) is a measure of the profitability of an investment, taking into account the registered profit, years of investment, initial investment, working capital, and scrap value. The ARR is expressed as a percentage and provides a more in-depth analysis of investment profitability compared to the simple ROI formula. A higher ARR indicates a better investment, as it reflects a higher return relative to the average investment over the period.
Let's consider an example:
Using the formula to calculate the Accounting Rate of Return:
\[ ARR = \left( \frac{100000}{5} \right) \div \left( \frac{500000 + 50000 + 10000}{2} \right) \times 100 = \frac{20000}{280000} \times 100 \approx 7.14\% \]
This means that the accounting rate of return for this investment is approximately 7.14%.
