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This method of determining the Accounting Rate of Return uses the basic formula ARR = Average Annual Profit / Average Investment. As with the first method, you'll need to find the Average Annual Profit. Deduct the amount of depreciation from the Annual Profit of your project, and you will be left with the Average Annual Profit. This number will be your numerator in the ARR equation. Average Investment represents the capital expenditure needed to kick-start a project, in addition to the final scrap value of any machinery, divided by two. This is expressed by the equation Average Investment = (Initial Investment + Scrap Value) / 2. Divide your Average Annual Profit by your Average Investment. The result, expressed as a percentage, is your ARR.
Find the Average Annual Profit. Calculate the Average Investment. Divide to get the ARR.