MYTUTOR SUBJECT ANSWERS

624 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...

1 year 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

18 SUBJECT SPECIALISTS

£26 /hr

James W.

Degree: Management (Masters) - St. Andrews University

Subjects offered:Business Studies, History+ 3 more

Business Studies
History
Government and Politics
Drama
-Personal Statements-

“I'm patient, kind and bubbly and look forward to hearing from you so that we get working on boosting your grades and helping you realise your potential.”

PremiumMegan J. A Level Business Studies tutor, GCSE Business Studies tutor,...
£24 /hr

Megan J.

Degree: BSc Business (Bachelors) - Lancaster University

Subjects offered:Business Studies, Extended Project Qualification+ 2 more

Business Studies
Extended Project Qualification
Economics
-Personal Statements-

“I study BSc Business at Lancaster University which is in the top 10 and the management school is triple accredited.”

£20 /hr

Toluwa R.

Degree: Economics and Statistics (Integrated Masters) - St. Andrews University

Subjects offered:Business Studies, Maths+ 1 more

Business Studies
Maths
-Personal Statements-

“I study Economics and Statistics because I enjoy learning about the role mathematics and statistics plays in our everyday.”

MyTutor guarantee

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 is Opportunity Cost?

Define cash flow and explains ways in which a business can improve its cash flow.

Explain the difference between redundancy and dismissal. A-level business, paper 1 2014.

How should I structure my answer to 40 mark questions?

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