The formulas
- Depreciation = (cost - salvage) / life
- Accounting income = (cash inflow - depreciation) x (1 - tax rate)
- Average investment = (cost + salvage) / 2
- ARR = accounting income / average investment
How it works
The accounting rate of return measures a project the way the income statement will show it: income after depreciation and tax, divided by the money tied up. Many firms use it next to NPV because it maps onto reported return on assets and bonus targets.
ARR ignores the timing of cash. A dollar in year five counts the same as a dollar in year one. Use it as a reporting check, and use NPV or IRR to make the investment call. The average investment basis is the more common version, since book value falls as the asset depreciates.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
Why two versions?
Some firms divide by the initial outlay, others by the average book value. Both are shown. State which one your policy uses.
Should I use tax depreciation?
ARR follows book accounting, so use book straight-line depreciation, as this tool does.
What hurdle rate applies?
Your firm sets it, often near its target return on assets.
Formulas on this page are the standard definitions.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.