The ratio of return before interest and taxes to the capital employed as calculated at the end of an accounting period. Differently stated, it is average profit divided by average investment. Averaging is based on arithmetic mean. The average investment is measured as the book value of assets dedicated to a given project. Accounting rate of return (ARR) is most often used to internally appraise investments and measure the performance of a set of projects and units within a firm.

However, this yardstick is seldom used by investors because it doesn’t take into account real cash flows- ARR is based on accounting figures which involve non-cash items. Furthermore, ARR doesn’t account for the time value of money. Because of this, and because ARR is unadjusted for non-cash items, the selection of investments based on it suffers from serious drawbacks. Its sole advantage is its straightforwardness and simplicity. In calculation, ARR leads to different results in comparison with cash-flow based measures such as the net present value (NPV).