💰 Finance calculator

Accounting Rate of Return Calculator

Calculate ARR for any capital project — from initial investment, salvage value, useful life, and average annual accounting profit. See the average investment base, straight-line depreciation, pass/fail verdict against your required threshold, and a year-by-year book value table.

Enter your project details

Use a preset or enter your own values. ARR = Average annual profit ÷ Average investment. The calculator derives depreciation automatically from the investment and salvage value.

🔵 Investment
💼
Total upfront cost of the project or asset
🏷️
Expected value at end of useful life (0 if none)
⏳
Project or asset lifespan
🟢 Profitability
📈
Accounting profit — not cash flow
⚪ Optional — hurdle rate
🎯
Company's minimum acceptable return

ARR formula

ARR = (Average annual profit ÷ Average investment) × 100
Average investment = (Initial + Salvage) ÷ 2
Depreciation = (Initial − Salvage) ÷ Useful life

ARR vs NPV — key difference

ARR uses accounting profit, not cash flow, and ignores the time value of money. It is fast and simple for screening — but should not replace NPV or IRR for final project decisions.

Tip: ARR is strongest as a quick filter — if a project fails the ARR threshold, deeper analysis is unlikely to save it. If it passes, move to discounted cash flow analysis before committing.
This calculator is for educational and planning purposes only. Real project decisions should account for tax effects, working capital changes, cash flow timing, financing costs, and risk — none of which ARR captures. Always complement ARR with NPV or IRR analysis.

Frequently asked questions

What is accounting rate of return (ARR)?

ARR is a capital-budgeting metric that measures average annual accounting profit as a percentage of average investment. It is used to screen capital projects quickly by comparing their expected return against a company's minimum required rate. ARR is simple and easy to communicate but does not account for the time value of money.

How is average investment calculated in ARR?

The most common method: Average investment = (Initial investment + Salvage value) ÷ 2. Some approaches use only the initial investment or beginning book value; the choice affects the ARR result so consistency within a comparison is essential.

Should annual profit be before or after depreciation?

ARR uses average annual accounting profit after depreciation. Using profit before depreciation will overstate ARR. If you only have pre-depreciation profit, subtract the annual straight-line depreciation first.

Is ARR the same as ROI?

They are related but different. ROI is a general return metric that can use many different bases. ARR is specifically used in capital budgeting and almost always uses the average investment as the denominator, making it more standardised within that context.

Does ARR consider the time value of money?

No — this is ARR's primary limitation. It treats profit equally regardless of when it is earned. A project returning large profits early looks the same as one returning profits late. For time-sensitive decisions, use NPV or IRR alongside ARR.

Related finance calculators

Average Total Assets Calculator Calculate average asset base — shares the same averaging logic used in ARR's average investment. Net Worth Calculator Track total assets and liabilities — the balance sheet context for capital investment decisions. Interest Expense Calculator Estimate the financing cost of the investment — compare against ARR to check if the return exceeds borrowing cost. Margin Calculator Analyse operating margin — a key input for estimating the annual profit figure used in ARR.

Disclaimer

This calculator is for educational and planning purposes only. It does not provide accounting, tax, investment, or financial advice. Real project decisions require tax analysis, cash flow timing, financing structure, risk review, and often NPV or IRR analysis alongside ARR.