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:
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—Thomas Carlyle (1795–1881)
“At the crash of economic collapse of which the rumblings can already be heard, the sleeping soldiers of the proletariat will awake as at the fanfare of the Last Judgment and the corpses of the victims of the struggle will arise and demand an accounting from those who are loaded down with curses.”
—Karl Liebknecht (1871–1919)
“A tree may grow a thousand feet tall, but its leaves will return to its roots.”
—Chinese proverb.