accounting rate of return Definition | Business Dictionaries from AllBusiness.com
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Business Definition for: accounting rate of return
Dictionary of Accounting Terms
accounting rate of return
See also simple rate of return
Dictionary of Business Terms
accounting rate of return

method of estimating the rate of return from an investment using a straight-line approach (not discounted or compounded). The investment inflows are totaled and the investment costs subtracted to derive the profit. The profit is divided by the number of years invested, then by the investment cost, to estimate an annual rate of return. The method is not as sophisticated as a discounted approach, which is used by modern accountants.

Related Terms:
simple rate of return

measure of profitability obtained by dividing the expected future annual net income by the required investment; also called accounting rate of return or unadjusted rate of return. Sometimes the average investment rather than the original initial investment is used as the required investment, which is called average rate of return. For example, consider the following investment:

Initial investment $6500
Estimated life 20 years
Expected annual net income $675

Then the simple rate of return is $675/$6500 = 10.4%. Using the average investment, which is usually assumed to be one-half of the original investment, the average rate of return will be doubled as follows:

$675
$6500/2		 = $675
$3250		 × = 20.8%
Copyright © 2005, 2000, 1995, 1987 by Barron's Educational Series, Inc., Reprinted by arrangement with Publisher.
 Copyright © 2007, 2000, 1997, 1987, by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
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