MYTUTOR SUBJECT ANSWERS

436 views

What is the average rate of return ?

The Average Rate of Return or ARR is one of three types of investment appraisal that are often asked in the form of a 10 mark question. A question that involves these calculations are often very badly answered across the country and subsequently being able to do them puts you in a very strong position.

Now, the ARR method basically looks at the total accounting return for a project to ultimately see if it meets the target return.

An important component of these questions is to not get put off by the large numerical figures instead go through the questions systematically as often they are very easy.

ARR is an equation which needs to be remembered but don't panic, it is very simple:

ARR (%) - Total net profit / no of years 

               ---------------------------------------- x100

                 Initial cost

In order to understand the arithmetic, consider an item of capital (e.g. a machine) which will cost £ 1 million to purchase, is expected to last 5 years, and will produce an annual net cash flow of £ 0.5 million.

Net Profit = £500,000 (annual profit) x 5 (no of years) = £2.5 million - 1 million (initial investment)

.... gives us the total net profit of £1.5 million

£1.5million (net profit) / 5 (no of years) = 300,000

300,000 / 1 million ( initial cost) = 0.3

0.3 x 100 = an ARR of 30%

Some of this may seem confusing but believe me once you get to grasp with it, you'll be willing for one of these questions to come up as they will be guaranteed marks.

Oliver C. A Level Business Studies tutor, A Level Philosophy and Ethi...

9 months ago

Answered by Oliver, an A Level Business Studies tutor with MyTutor


Still stuck? Get one-to-one help from a personally interviewed subject specialist

9 SUBJECT SPECIALISTS

£20 /hr

Modupeola A.

Degree: Accounting and Finance (Bachelors) - Edinburgh University

Subjects offered:Business Studies, English Literature+ 4 more

Business Studies
English Literature
Economics
Accounting
-Personal Statements-

“I am a part-time tutor studying Accounting and Finance at the University of Edinburgh. I look forward to working with you to achieve your target grades. ”

Robyn C. A Level Business Studies tutor, GCSE Design & Technology tut...
£30 /hr

Robyn C.

Degree: Business Management (Bachelors) - Cardiff University

Subjects offered:Business Studies, -Personal Statements-

Business Studies
-Personal Statements-

“Hi, my name is Robyn and I am a Business Management student at Cardiff University.  I am very patient and friendly and really enjoy teaching. I have been teaching Taekwondo since I was 15, so have a lot of experience teaching, with pe...”

£20 /hr

Matthew M.

Degree: MSci Computer Science (Masters) - Lancaster University

Subjects offered:Business Studies, Maths+ 3 more

Business Studies
Maths
Economics
Computing
-Personal Statements-

“About Matt: I'm Matt and I am a computer science student at Lancaster University. I have often been described as being friendly and hardworking by my friends, family and work colleagues. Prior to University I worked in the industry as...”

About the author

Oliver C.

Currently unavailable: for regular students

Degree: Philosophy, Politics and Economics (Bachelors) - Manchester University

Subjects offered:Business Studies, Philosophy and Ethics

Business Studies
Philosophy and Ethics

“About me: Hello, my name is Ollie and I am in my first year studying Philosophy, Politics and Economics at the University of Manchester. I absolutely loved my time in 6th form and I would love to have the opportunity to share the pass...”

MyTutor guarantee

You may also like...

Posts by Oliver

Explain the significance of the Golden Mean in relation to Aristotle's Virtue Theory ?

What is the average rate of return ?

Other A Level Business Studies questions

What are methods of promotion?

Define the term 'added value'.

What is cash flow?

What is product diversification?

View A Level Business Studies tutors

We use cookies to improve your site experience. By continuing to use this website, we'll assume that you're OK with this. Dismiss

mtw:mercury1:status:ok