How does depreciation affect the calculation of a project's accounting rate of return (ARR)?

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Quizplus · Accepted Answer

Depreciation is a non-cash expense that reduces the book value of an asset over its useful life. As a result, it should be deducted from the annual cash inflows when calculating the project's accounting rate of return (ARR). ARR is a profitability measure that considers the total net earnings generated by a project over its life as a percentage of the initial investment. Since depreciation reduces the taxable income and cash outflows, it should be subtracted from the earnings to get an accurate measure of profitability.

How Does Depreciation Affect the Calculation of a Project's Accounting