# Bureaucracy

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Accounting Rate of Return | ARR | AAR | ROI
Definition
Accounting Rate of Return, shortly referred to as ARR, is the percentage of average accounting profit earned from an investment in comparison with the average accounting value of investment over the period.
Accounting Rate of Return is also known as the Average Accounting Return (AAR) and Return on Investment (ROI).
Topic Contents: 1. Definition 2. Formula 3. Explanation 4. Example 5. Advantages 6. Limitations

Formula Accounting Rate of Return | = | Average Profit | % | | | Average Book Value | |
Where:
Average Profit | = | Total accounting profit over the investment period | | | Years of Investment |

Average Book Value | = | Initial investment + Scrap Value + Working Capital | | | 2 | or Average Book Value | = | N.B.V. (year 0) + N.B.V. (year 1) + N.B.V. (year 2) + ... | | | Years of Investment + 1 |

Explanation
ARR is a measure of accounting profitability of investments.
An ARR of 10% for example means that the investment would generate an average of 10% annual accounting profit over the investment period based on the average investment.
ARR may be compared with the target return on investment. Investments may be accepted if the ARR exceeds the target return. However, it is preferable to evaluate investments based on theoretically superior appraisal methods such as NPV and IRR due to the limitations of ARR discussed below.
The calculation of ARR requires finding the average profit and average book values over the investment period. Whereas average profit is fairly simple to calculate, there are several ways to calculate the average book value of investment.
How should average book value be calculated? Expand Text

Example
ABC PLC is planning to invest in a 5-year project.
The initial cost of the project shall be \$100 million comprising \$60…...

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