Accounting Rate of Return Calculator
The accounting rate of return turns a project's average annual accounting profit into a percentage return on the capital invested. Because it uses profit after depreciation rather than cash flow and ignores the timing of returns, it is a quick screen rather than a definitive measure. There are two common conventions for the denominator: the original investment, or the average investment over the asset's life. This calculator takes the average annual profit, the initial investment, and the salvage value, then returns ARR on both bases. All money figures are in US dollars.
Accounting rate of return formula
ARR on initial = average annual profit / initial investment * 100
Average investment = (initial investment + salvage value) / 2
ARR on average = average annual profit / average investment * 100
Average annual profit is accounting profit after depreciation. The average-investment basis recognizes that book value falls over the asset's life, so it usually gives a higher ARR than the initial-investment basis.
Using ARR
- Use accounting profit after depreciation, not cash flow, for the numerator.
- Pick the denominator convention your organization requires: initial or average investment.
- ARR ignores the time value of money, so confirm with NPV or IRR before deciding.
- Compare the result to your firm's required ARR or hurdle rate.
- Enter your own project figures; the tool stores no preset data.
Accounting rate of return: frequently asked questions
What is the accounting rate of return?
The accounting rate of return (ARR), also called the average rate of return, expresses an investment's average annual accounting profit as a percentage of the capital invested. It uses profit after depreciation, not cash flow, and ignores the time value of money.
How is ARR calculated?
ARR = average annual accounting profit / investment x 100. Two conventions exist for the denominator: the initial investment, or the average investment, which is the initial cost plus salvage value divided by two. This calculator shows ARR on both bases so you can use whichever your method requires.
What is average investment?
Average investment is the mean book value of the asset over its life, calculated as the initial investment plus the salvage (residual) value, divided by two. It reflects that the asset's book value declines through depreciation, so on average less capital is tied up than the original cost.
How does ARR differ from IRR?
ARR is based on accounting profit and ignores the timing of cash flows, so it does not account for the time value of money. Internal rate of return (IRR) is based on discounted cash flows and does. ARR is simpler but less rigorous; use it as a quick screen, not a final decision rule.
What ARR is acceptable?
Companies usually set a required ARR or hurdle rate; projects above it are candidates for acceptance. The threshold reflects the cost of capital and risk. Because ARR ignores cash timing, confirm attractive projects with a discounted method before committing.
Official sources
- U.S. Small Business Administration, business planning resources: sba.gov.
- Investor.gov, investing basics glossary: investor.gov.
Reviewed by the CalculatorHub team, edited by James Graham, 17 June 2026. See our methodology.