ARR Formula
The average
profit is divided by the Average investment.
Accounting Rate of Return = (Average Annual Profit/Average
Investment) x 100
ARR Formula Example
ABC & Company purchased machinery for $ 1500. Disposal
value of machine at end of project was $ 500. Cash inflows during the year are
expected as under
1
|
$ 300
|
2
|
$ 200
|
3
|
$ 250
|
4
|
$ 200
|
5
|
$ 250
|
Solution
1.
Calculate Depreciation
Depreciation =Cost of
Plant –Disposal Value
Depreciation =$ 1500- $
500= $ 1,000
2.
Calculate Profit & Average Profit
Total Cash flow
–Deprecation
= 1,200$ –$ 400
= $ 800 (Total Profit)
= $ 800/ 5 Years
=$ 160 (average Profit)
3.
Average Investment
Highest Investment = $
1,500
Lowest Investment
(Disposal value) = $ 500
Total investment = $ 1,500
+ $ 500 = $ 2,000
Average Investment = $
2000/2 = $ 1000
4.
Accounting Rate of Return
Average profit /Average
Investment
= 160/1000 x 100
=16%
