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KembaraXtra- Financial Terms- accounting rate of return (ARR) is an accounting ratio used to measure profitability in relation to the capital employed by a business or investment project.
ARR is usually calculated by expressing profit before interest and taxation as a percentage of the capital employed at the end of a financial period, often one year.
Different versions of ARR may use profit after interest and taxation, equity capital employed, or the average capital employed during the accounting period. These variations provide different perspectives on performance.
The accounting rate of return is commonly used to evaluate investment projects and business performance because it is simple to understand and apply.
However, financial experts generally consider discounted cash flow methods to be more accurate for investment appraisal because they take into account the time value of money, which ARR does not fully address.
ARR is usually calculated by expressing profit before interest and taxation as a percentage of the capital employed at the end of a financial period, often one year.
Different versions of ARR may use profit after interest and taxation, equity capital employed, or the average capital employed during the accounting period. These variations provide different perspectives on performance.
The accounting rate of return is commonly used to evaluate investment projects and business performance because it is simple to understand and apply.
However, financial experts generally consider discounted cash flow methods to be more accurate for investment appraisal because they take into account the time value of money, which ARR does not fully address.
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