The rate of average annual net income to the initial investment or average investment (book value) is called accounting rate of return.
The accounting rate of return (ARR) is a formula which reflects the percentage rate of return expected on an investment or any asset, when compared to the initial investment's cost or in other words the book value of asset.
The ARR formula divides an asset's average revenue by the company's initial investment to take the results of the ratio or return that can be expected over the lifetime of an asset or project by a person.
ARR do not consider the time value of money or cash flows, which can be an integral part of maintaining a business.
The accounting rate of return is a capital budgeting method which is useful if any person wants to calculate an investment's profitability quickly.
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