The Aar Calculator is a useful financial tool to evaluate the profitability of an investment by determining its Average Accounting Rate of Return (AAR). It is particularly helpful for businesses and investors to assess the return on periodic cash flows relative to the initial investment.
Formula
The formula for calculating AAR is:
AAR = (PMT / PV) ∗ 100
Where:
- AAR = Average Accounting Rate of Return
- PMT = Periodic Cash Flow
- PV = Present Value of the investment
How to Use
- Enter the periodic cash flow (PMT) in the respective field.
- Input the present value (PV) of the investment.
- Click on the “Calculate” button.
- The calculator will display the AAR in percentage format.
Example
If a company has periodic cash flows of $10,000 and the present value of the investment is $50,000, the AAR is:
AAR = (10,000 / 50,000) ∗ 100 = 20%
FAQs
1. What is AAR used for?
AAR is used to evaluate the profitability of an investment based on accounting figures rather than cash flows.
2. Can this calculator be used for monthly and yearly cash flows?
Yes, but ensure consistency in the time period of PMT and PV.
3. What happens if PV is zero?
If PV is zero, the calculation is invalid because division by zero is undefined.
4. Can the AAR be negative?
Yes, if the periodic cash flow (PMT) is negative.
5. Is AAR the same as ROI?
No, AAR focuses on accounting returns, while ROI measures overall return on investment.
6. Can I use this calculator for multiple investments?
Yes, you can calculate the AAR for each investment individually.
7. What units should PMT and PV be in?
They should be in the same currency or unit for accurate results.
8. Is AAR suitable for comparing investments?
Yes, it provides a quick way to compare the profitability of different investments.
9. Can this tool handle large numbers?
Yes, as long as the input values are within the range supported by JavaScript.
10. What if my PMT varies over time?
AAR assumes a consistent PMT; for varying cash flows, other metrics like NPV might be more appropriate.
11. Does AAR account for time value of money?
No, AAR does not consider the time value of money.
12. How do I interpret the AAR result?
A higher AAR indicates a more profitable investment.
13. Is AAR widely used in business?
Yes, especially for quick assessments, but it may be supplemented with other financial metrics.
14. What are the limitations of AAR?
AAR does not account for time value of money or cash flow variability.
15. Can I use this calculator offline?
Yes, as long as the code is saved locally, it works without an internet connection.
16. Does this calculator work for international currencies?
Yes, as long as the input values are in the same currency.
17. Can AAR be used for personal finance?
Yes, it’s helpful for evaluating investments like rental properties or savings plans.
18. Is this calculator customizable?
Yes, with basic coding knowledge, you can adapt it to your needs.
19. What is the significance of the result being zero?
A zero AAR means the periodic cash flow equals zero, indicating no return.
20. Can this calculator show multiple results?
This version displays only one result at a time, but it can be modified for batch processing.
Conclusion
The Aar Calculator is a practical tool for evaluating investment profitability through the Average Accounting Rate of Return. By providing a clear percentage, it enables informed financial decisions and comparative analysis.