**Average Accounting Rate of Return**is a technique that

**measures the profitability of a project using the accounting profits of the company.**ARR is the average net income expected by a project divided by the average capital cost.

__ARR is also known as the Average Rate of return or Simple Rate of Return.__$$ARR=\frac { Average\quad Net\quad Profit }{ Average\quad Investment } $$

Where,

$$Average\quad Net\quad Profit=\frac { Total\quad Profit\quad in\quad investment }{ No.\quad of\quad Years } $$

**Average Investment**=

- ARR is a tool used in Capital budgeting to
**evaluate the returns of various investments**by**using accounting profits instead of cash flows.** - ARR ignores the Time Value of Money.
**A Project is assumed to be profitable if ARR >= Expected Rate of Return.**

**Example 1:**ABC Ltd. has initially invested Rs. 500000.00 in a project with the following cash flow, calculate the ARR of the project.

Year |
1 | 2 | 3 | 4 |

Net Profit |
110000.00 | 125000.00 | 135000.00 | 150000.00 |

**Solution:**

Average Net Profit = (110000 + 125000 + 135000 + 150000) / 4 = 520000 / 4 = 130000.00

Average Investment = (500000 – 0) / 2 = 250000

ARR = Average Net Profit / Average Investment = 130000 / 250000 = 0.52

**Hence, ARR = 0.52 or 52%**