Average rate of return – ARR
Average rate of return – ARR, %
Average rate of return is the ratio between average annual receipts and the amount of initial investment, calculated by the formula:
CFn – net cash flow in the n period,
In – initial investment in the n period (or total investment),
N – duration of the project in years.
is interpreted as the average annual revenue that can be obtained from the project.
The indicator is simple and convenient, but it also has drawbacks. In particular, the time value of money is not taken into account.