The Average Rate of Return (ARR), or the Accounting Rate of Return (AAR), is a commonly used approach in capital budgeting. ARR measures an investment's profitability by comparing the average accounting profit to the average accounting value.
For instance, a retail company considering a $300,000 investment in new inventory management software could use ARR to estimate profitability. If the software is expected to generate an additional $60,000 in annual profits over five years, ARR would give the company a way to gauge the return on this investment.
This metric provides a straightforward way to assess financial performance by calculating the annual return as a percentage of the investment's average book value. While ARR is appealing for its simplicity, it does not account for the time value of money or consider the risks associated with an investment. Despite these limitations, ARR remains applicable for quick, initial investment assessments in capital budgeting.
From Chapter 7:
Now Playing
Capital Budgeting
92 Views
Capital Budgeting
295 Views
Capital Budgeting
174 Views
Capital Budgeting
143 Views
Capital Budgeting
418 Views
Capital Budgeting
187 Views
Capital Budgeting
112 Views
Capital Budgeting
88 Views
Capital Budgeting
95 Views
Capital Budgeting
318 Views
Capital Budgeting
208 Views
Capital Budgeting
94 Views
Capital Budgeting
206 Views
Capital Budgeting
71 Views
Capital Budgeting
81 Views
See More
Copyright © 2025 MyJoVE Corporation. All rights reserved