Accounting Rate of Return (ARR) is a method of analysis that measures the magnitude of the rate of profit from an investment. The methods of analysis in the language of Indonesia is call the Accounting rate of return it is essentially measure the income or profit from the expect annual results of an investment. In other words, ARR calculates how much money will be return to the investor of an investment.
With the calculation of the ARR this, investors can analyses the risks involve in making investment decisions and decide if his income is high enough to accept the level of risk will occur.
The formula of the ARR (Accounting Rate of Return) or the accounting rate of return is calculate by dividing the income from the Investments and costs of investment. In General, both of these figures are annual figures or average annual figures. But we can also use weekly or monthly depending on our needs. The result of the calculation of the ARR is usually shown in the form of a percentage (%).
ARR = net income from investment/cost of Investment
or
ARR = average net income from Investments/average cost of Investment
Example of calculation of ARR (Accounting Rate of Return)
It gets a project that requires an Initial investment or investment costs amounting to $ 500 million. This project can generate Cash Inflow of $. 100 million per year by the age of 10 years without economic value of residue.
Note:
Investment cost: USD 500 Million
Economic Age: 10 years
Cash Inflow per year: $. 100 Million
Depreciation per year: $. 50 Million
Solution:
ARR = Investment Income/Costs Investment
ARR = ($. 100 million – $. 50 million)/IDR 500 Million
ARR = $. 50 million/USD 500 Million
ARR = 0.1 or 10%
So the accounting rate of return or the Accounting Rate of Return (ARR) in these projects is 10%.
The businessman or Investor can assess whether to continue or cancel it investment with a profit of 10%. In General, the businessman or investor can compare the interest factor applies to a decision. When consider advantageous, then the investment project in question will be resume. But if the harm, then the investment plan will be cancel.
In addition, the businessman or investor can also compare two or more projects and assess which are the most profitable project so as to provide input for the selection of projects. It can be said that the higher the value the higher his ARR also returns (more profitable).
The formula of the ARR (Accounting Rate of Return)
The formula of the ARR (Accounting Rate of Return) or the accounting rate of return is calculate by dividing the income from the Investments and costs of investment. In General, both of these figures are annual figures or average annual figures. But we can also use weekly or monthly depending on our needs. The result of the calculation of the ARR is usually shown in the form of a percentage (%).
ARR = net income from investment/cost of Investment
or
ARR = average net income from Investments/average cost of Investment
Example of calculation of ARR (Accounting Rate of Return)
It gets a project that requires an Initial investment or investment costs amounting to $ 500 million. This project can generate Cash Inflow of $. 100 million per year by the age of 10 years without economic value of residue.
What is the ARR project?
Note:
Investment cost: USD 500 Million
Economic Age: 10 years
Cash Inflow per year: $. 100 Million
Depreciation per year: $. 50 Million
Solution:
ARR = Investment Income/Costs Investment
ARR = ($. 100 million – $. 50 million)/IDR 500 Million
ARR = $. 50 million/USD 500 Million
ARR = 0.1 or 10%
So the accounting rate of return or the Accounting Rate of Return (ARR) in these projects is 10%.
Analysis and assessment of ARR
The businessman or Investor can assess whether to continue or cancel it investment with a profit of 10%. In General, the businessman or investor can compare the interest factor applies to a decision. When consider advantageous, then the investment project in question will be resume. But if the harm, then the investment plan will be cancel.
In addition, the businessman or investor can also compare two or more projects and assess which are the most profitable project so as to provide input for the selection of projects. It can be said that the higher the value the higher his ARR also returns (more profitable).
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