A method that is used as part of capital budgeting decision making whereby a rate of return for a project or investment is calculated based on a ratio of its average income to investment outlay (in terms of total initial investment or average investment over the life of the project/ investment).

This measure (known for short as ARR) relates accounting returns (average annual net income, average annual accounting earnings) to the total initial investment or average investment:

ARR = average annual net income / total initial investment

Projects/ investments that produce accounting returns exceeding a management-determined minimum return (threshold/ cutoff rate) are accepted, while those with returns below the minimum return are rejected.

As a method of capital budgeting, ARR has multiple setbacks including the use of accounting returns (accounting income) rather than cash flows, and the negligence of the time value of money (TVM) concept. Furthermore, the determination of its threshold level solely depends on the discretion of management, while the method establishes no connection with the potential impact of a project/ investment on shareholder equity.