The average accounting return (AAR) is the average project earnings after taxes and depreciation, divided by the average book value of the investment during its life.
There are three steps to calculating the AAR.
First, determine the average net income of each year of the project's life. Second, determine the average investment, taking depreciation into account. Third, determine the AAR by dividing the average net income by the average investment.
Average accounting return does have a disadvantage; it does not take time value of money into account. Therefore, there is no clear indication of profitability.
Famous quotes containing the words average, accounting and/or return:
“Whether or not his newspaper and a set of senses reduced to five are the main sources of the so-called “real life” of the so- called average man, one thing is fortunately certain: namely, that the average man himself is but a piece of fiction, a tissue of statistics.”
—Vladimir Nabokov (1899–1977)
“I, who am king of the matter I treat, and who owe an accounting for it to no one, do not for all that believe myself in all I write. I often hazard sallies of my mind which I mistrust.”
—Michel de Montaigne (1533–1592)
“We draw our Presidents from the people. It is a wholesome thing for them to return to the people. I came from them. I wish to be one of them again.”
—Calvin Coolidge (1872–1933)