Accept the project only if its ARR is equal to or greater than the required accounting rate of return. Some hotels calculate ARR or ADR by also including the complimentary rooms this is called as Hotel Average Rate. 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Then, to arrive at the final figure for annual net profit, simply subtract the depreciation expense from your annual revenue figure. In B5, write =AVERAGE(C2:G2)/AVERAGE(B3:B4). Of course, that doesn’t mean too much on its own, so here’s how to put that into practice and actually work out the profitability of your investments. That’s relatively good, and if it’s better than the company’s other options, it may convince them to go ahead with the investment. … Another variation of ARR formula uses initial investment instead of average investment. Accounting Rate of Return (ARR) is the percentage rate of return that is expected from an investment or asset compared to the initial cost of investment. What is CAGR (compound annual growth rate)? Some business might use variations of all of the above models. Thus there is problem of consistency. The formula for ARR is: ARR = Average Annual Profit / Average Investment Where: 1. In order to make capital investment decisions businesses can use various appraisal methods such as Accounting Rate of Return (ARR), Payback Period (PP), Net Present Value (NPV) and Internal Rate of Return(IRR). For example, if your business needs to decide whether to continue with a particular investment, whether it’s a project or an acquisition, an ARR calculation can help to determine whether going ahead is the right move.