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Determine Net Cost Savings. Divide to get the ARR.

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When you use an ARR to evaluate cost reduction projects, you'll want to use the basic formula ARR = Net Cost Savings / Initial Investment. First, you'll need to find the Net Cost Savings. This is a two-part process: Add together the amount of operating expenses and depreciation expenses. Deduct the sum total from the projected reduction in labor costs resulting from the use of new equipment. Divide the Net Cost Savings by the Initial Investment. The result, expressed as a percentage, is your ARR.