Another relatively simple valuation technique is the accounting rate of return (ARR). The ARR is the average annual profit from an investment as a proportion of the initial or average outlay.

ARR = Average annual profit/Initial (or average) outlay

Example:

 

The ARR technique suffers from its failure to take any account of the timing of profits on the investment. Furthermore, it uses accounting data rather than cash flow data and hence is subject to the choice of accounting techniques employed in preparing the financial statements.