Formula for ARR
Accounting rate of return is calculated by dividing annual
profit with average investment during the year i.e. Accounting Rate of Return =
Average Annual Profit/Average Investment.
Example of ARR Formula
ABC invested
$ 600 in a project. The plant & machinery valued at close of project was $
200.
|
1
|
$ 100
|
|
2
|
$ 200
|
|
3
|
$ 250
|
|
4
|
$ 300
|
|
5
|
$ 250
|
Solution
1.
Calculate Depreciation
Depreciation =Cost of
Plant –Disposal Value
Depreciation =$ 600- $ 200=
$ 400
2.
Calculate Profit & Average Profit
Total Cash flow –Deprecation
= 1,100 – 400
= $ 700 (Total Profit)
= $ 700/ 5 Years
=140 (average Profit)
3. Average
Investment
Highest level investment =
$ 600
Lowest investment
(Disposal value) = $ 400
Total investment = $ 600 +
$ 400 = $ 1000
Average Investment = $
1000/2 = $ 500
4. Accounting
Rate of Return
Average profit /Average
Investment
= 140/500
=28%
