## Accounting Rate of Return Solution

STEP 0: Pre-Calculation Summary
Formula Used
Accounting Rate of Return = (Average Annual Profit/Initial Investment)*100
ARR = (AP/Initial Invt)*100
This formula uses 3 Variables
Variables Used
Accounting Rate of Return - Accounting Rate of Return is a financial metric used to evaluate the profitability of an investment or project.
Average Annual Profit - Average Annual Profit refers to the average amount of profit earned by a business or project over a period of one year.
Initial Investment - The Initial Investment is the amount required to start a business or a project.
STEP 1: Convert Input(s) to Base Unit
Average Annual Profit: 700 --> No Conversion Required
Initial Investment: 2000 --> No Conversion Required
STEP 2: Evaluate Formula
Substituting Input Values in Formula
ARR = (AP/Initial Invt)*100 --> (700/2000)*100
Evaluating ... ...
ARR = 35
STEP 3: Convert Result to Output's Unit
35 --> No Conversion Required
35 <-- Accounting Rate of Return
(Calculation completed in 00.004 seconds)
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## Credits

Created by Vishnu K
BMS College of Engineering (BMSCE), Bangalore
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## < 12 Capital Budgeting Calculators

Overall Cost of Capital
Overall Cost of Capital = (Market value of the firm’s equity)/(Market value of the firm’s equity+Market Value of the Firm’s Debt)*Required Rate of Return+(Market Value of the Firm’s Debt)/(Market value of the firm’s equity+Market Value of the Firm’s Debt)*Cost of Debt*(1-Tax Rate)
Discounted Payback Period
Discounted Payback Period = ln(1/(1-((Initial Investment*Discount Rate)/Periodic Cash Flow)))/ln(1+Discount Rate)
Net Present Value (NPV) for even cash flow
Net Present Value (NPV) = Expected Cash Flow*((1-(1+Rate of Return)^-Number of Periods)/Rate of Return)-Initial Investment
Capital Asset Pricing Model
Expected Return on Investment = Risk Free Rate+Beta on Investment*(Expected Return on Market Portfolio-Risk Free Rate)
Modified Internal Rate of Return
Modified Internal Rate of Return = 3*((Present Value/Cash Outlay)^(1/Number of Years)*(1+Interest)-1)
Cost of Retained Earnings
Cost of Retained Earnings = (Dividend/Current Stock Price)+Growth Rate
After-Tax Cost of Debt
After Tax Cost of Debt = (Risk Free Rate+Credit Spread)*(1-Tax Rate)
Terminal Value using Perpetuity method
Terminal Value = Free Cash Flow/(Discount Rate-Growth Rate)
Accounting Rate of Return
Accounting Rate of Return = (Average Annual Profit/Initial Investment)*100
Payback Period
Payback Period = Initial Investment/Cashflow per Period
Terminal Value using Exit Multiple Method
Terminal Value = EBITDA at Last Period*Exit Multiple
Cost of Debt
Cost of Debt = Interest Expense*(1-Tax Rate)

## Accounting Rate of Return Formula

Accounting Rate of Return = (Average Annual Profit/Initial Investment)*100
ARR = (AP/Initial Invt)*100

## What is Accounting Rate of Return?

The ARR (Accounting Rate of Return), also known as the Average Rate of Return or the Return on Investment (ROI), is a financial metric used to evaluate the profitability of an investment or project.
The ARR is expressed as a percentage and represents the return earned on the investment on an annualized basis. It provides a simple measure for comparing the profitability of different investment opportunities or projects. However, it has some limitations, such as not considering the time value of money or the timing of cash flows, which may make it less suitable for evaluating projects with uneven cash flows over time.

## How to Calculate Accounting Rate of Return?

Accounting Rate of Return calculator uses Accounting Rate of Return = (Average Annual Profit/Initial Investment)*100 to calculate the Accounting Rate of Return, The Accounting Rate of Return formula is defined as a financial metric used to evaluate the profitability of an investment or project. It calculates the average annual profit or return generated by an investment relative to its initial cost. Accounting Rate of Return is denoted by ARR symbol.

How to calculate Accounting Rate of Return using this online calculator? To use this online calculator for Accounting Rate of Return, enter Average Annual Profit (AP) & Initial Investment (Initial Invt) and hit the calculate button. Here is how the Accounting Rate of Return calculation can be explained with given input values -> 34.8 = (700/2000)*100.

### FAQ

What is Accounting Rate of Return?
The Accounting Rate of Return formula is defined as a financial metric used to evaluate the profitability of an investment or project. It calculates the average annual profit or return generated by an investment relative to its initial cost and is represented as ARR = (AP/Initial Invt)*100 or Accounting Rate of Return = (Average Annual Profit/Initial Investment)*100. Average Annual Profit refers to the average amount of profit earned by a business or project over a period of one year & The Initial Investment is the amount required to start a business or a project.
How to calculate Accounting Rate of Return?
The Accounting Rate of Return formula is defined as a financial metric used to evaluate the profitability of an investment or project. It calculates the average annual profit or return generated by an investment relative to its initial cost is calculated using Accounting Rate of Return = (Average Annual Profit/Initial Investment)*100. To calculate Accounting Rate of Return, you need Average Annual Profit (AP) & Initial Investment (Initial Invt). With our tool, you need to enter the respective value for Average Annual Profit & Initial Investment and hit the calculate button. You can also select the units (if any) for Input(s) and the Output as well.
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