The Accounting Rate of Return (ARR), also known as the Return on Investment (ROI) or Book Rate of Return, is a capital budgeting metric that measures the expected annual profitability of a project or investment as a percentage of the initial capital invested — using accounting profit figures rather than cash flows. It is calculated as: ARR = (Average Annual Net Profit ÷ Initial Investment) × 100. Unlike the Net Present Value (NPV) and Internal Rate of Return (IRR) methods, ARR does not discount future cash flows for the time value of money — making it simpler to calculate but theoretically less rigorous. ARR is used as a quick screening tool for capital investment decisions — projects with ARR above the company's minimum required accounting return are considered acceptable. In Indian corporate finance, ARR is particularly used by smaller companies and for quick preliminary assessment of expansion projects before more detailed NPV analysis. For equity investors evaluating Indian companies, the concept underlying ARR — return on invested capital — is central to business quality assessment: companies that consistently generate ARR above their cost of capital are creating shareholder value, while those earning below their cost of capital are destroying it regardless of reported accounting profits.
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