Difference between IRR ie Internal rate of return and ARR ie Annual rate of return?

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The terms are commonly used for viability analysis of new projects to go ahead with.

Difference between IRR ie Internal rate of return and ARR ie Annual rate of return?windows 98

The first and main difference is that an ARR is for one year only. While an IRR can be computed for a period of 1 or more years. =)

Second, we usually use IRR when making projections of expected income of a proposed project. On the other hand, when we speak of ARR, we usually refer to historical data (computation of rate based on income already earned, not income forecasted. Just a matter of point of view).

ARR is actually a form of IRR, although for one year only.

To make things simple:

Let's say you invested 100 today for a project expected to provide income of 40 after a year. To get the ARR, we simply divide 40 by 100. The ARR then is 40%. Your project earned 40% after one year. At this time, the IRR is also 40%.

Another example. Let's say you invested 100 today for a project expected to provide income of 40 EVERY YEAR FOR 5 YEARS. At the end of the first year, the ARR is 40% (40/100). At the end of the second year, the rate is no longer 40% because now you have 140 to begin with! The computation of ARR is 40/140, which is 28.57%. At the 3rd year, 22.22% (40/180), and so on.

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Difference between IRR ie Internal rate of return and ARR ie Annual rate of return?

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