Accounting Rate of Return

An accounting method used in capital budgeting to estimate average returns from a project over its working life. However, as it uses profit rather than cash flow it does not account for the time value of money. This can be used for comparison purposes between different potential investment; the one with the highest ARR is considered to be the most attractive while with an ARR at less than the required rate of return should be rejected.

This definition is for general information purposes only