Accounting rate of return

ARR uses accounting profit rather than cash flow. The denominator may be average investment or initial investment, depending on the question or stated policy, so the basis must always be identified. With straight-line depreciation and no other investment components, average investment is often (initial cost + residual value)/2. Include working capital where the chosen definition requires it. ARR is familiar to managers who use accounting performance targets, but it ignores the timing of profits and cash flows and can be affected by accounting policies. Compare with a target calculated on the same basis.