The average rate of return (ARR) is the average annual amount of cash flow generated over the life of an investment and it is a financial ratio used in capital budgeting. The ratio does not take into account the concept of time value of money. ARR calculates the return, generated from net income of the proposed capital investment. The ARR is a percentage return.
Formula:
ARR = ((SP - OC) / OC)
Where,ARR - Average Rate of Return
SP = Selling Price
OC = Original Cost
A = Number of years to hold the Stock