What is Accounting Rate of Return | ARR
The Accounting Rate of Return (ARR) is a business performance metric that tells you how much profit an investment is expected to make, compared to how much it costs.
It’s often used to help decide whether or not a project, purchase, or investment is worth doing.
💰 “If I spend money on this new machine or project, how much will it earn me each year compared to the cost?”
How to calculate accounting rate of return with examples 🔢:
ARR (%) = (Average Annual Accounting Profit / Initial Investment) × 100
Where:
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Average Annual Accounting Profit = your expected profit per year (after expenses, before taxes)
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Initial Investment = the amount you spend to start the project or buy the asset
Real-Life Accounting Rate of Return Example
A bakery invests $10,000 in a new oven.
It expects to earn $3,000 per year in extra profit.
ARR = (3,000 / 10,000) × 100 = 30
If the bakery has a minimum required ARR of 20%, this investment is a ✅ go-ahead.
What Is a Good Accounting Rate of Return (ARR)?
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Below 10% - Often too low — might not be worth the risk or effort.
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10% – 20% - Acceptable for low-risk, stable projects.
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20% – 30% - Strong return for moderate-risk investments.
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30% or higher - Excellent return — often seen in high-growth or high-risk projects.
Why is Accounting Rate of Return Important?
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It’s simple to calculate and understand
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Helps compare different projects easily
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Useful in budgeting and capital investment decisions
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Shows how well an investment performs on paper
However, ARR doesn’t consider time value of money (like Internal Rate of Return), so it’s best used alongside other methods.