ARR calculates the return, generated from net income of the proposed capital investment.
Say, if ARR = 7%, then it means that the project is expected to earn seven cents out of each dollar invested (yearly).
If the ARR is equal to or greater than the required rate of return, the project is acceptable.
More than half of large firms calculate ARR when appraising projects.
The ARR is built on evaluation of profits, and it can be easily manipulated with changes in depreciation methods.