Accounting Rate of Return (ARR)
Candlefocus EditorIt is essential to note the difference between ARR and the required rate of return, or RRR. ARR is an estimate of the expected return rate for a project or investment, while RRR evaluates the minimum return an investor would accept for purchasing an investment or taking on a project given the level of risk associated with the investment or project. Thus, an investor or a company might require a higher rate of return (RRR) than what is calculated by the ARR, meaning a project which doesn’t have a positive expected return may not be attractive as an investment option.
ARR is a useful tool for making investment decisions, as it helps investors to assess and compare the risk versus reward of each project or investment option. It is important to remember that ARR doesn’t consider long-term cash flows and is not suitable for making decisions about investments with different cash flow profiles. Additionally, inflation rates, market and industry trends, and other economic factors may have a significant impact on the returns of an investment and are not taken into account in an ARR calculation.
In conclusion, Accounting Rate of Return (ARR) is a useful tool to evaluate and compare potential projects or investments. ARR provides an estimate of proportion of the projected profits earned from each project or investment. However, ARR does not take into account the impact of inflation and is not suitable for determining returns from investments that have a different cash flow profile. It’s important to consider both ARR and the required rate of return for making sound investment decisions.