Average accounting return
What is average accounting return?
This is a way of estimating the value of a project. To calculate it, you would divide its average earnings by the average amount invested.
Where have you heard about average accounting return?
If you're a business owner, you might have heard about it as part of capital budgeting . It's often used alongside other calculations such as net present value and internal rate of return .
What you need to know about average accounting return.
It's sometimes known as accounting rate of return and is designed to help business owners decide if a project is worthwhile. To calculate it, you would work out the average operating profits before interest and taxes but after depreciation, and divide this by the book value of the average amount invested. Average accounting return is expressed as a percentage. So if a project requires an average investment of £100,000 and will generate an average annual profit of £10,000, its average accounting return is 10%.
Find out more about average accounting return.
Learn more about the relationship between costs and benefits of a project with our guide to profitability index .