Accounting Rate of Return (ARR) is a method used to evaluate an investment based on the average annual accounting profit.

It is calculated as:

ARR = (Average Annual Profit ÷ Average Investment) × 100

It helps businesses:

Compare different investment projects

Measure profitability in percentage terms

Make capital budgeting decisions

However, ARR does not consider:

Time value of money

Cash flows (it uses accounting profit instead)

In simple terms, ARR shows the percentage return expected from an investment based on accounting profits.