Average Rate of Return A2 Business Studies. Aims and Objectives Aim: To understand the investment...
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Average Rate of Return A2 Business Studies. Aims and Objectives Aim: To understand the investment appraisal technique: Average Rate of Return. Objectives:
Aims and Objectives Aim: To understand the investment appraisal
technique: Average Rate of Return. Objectives: Define ARR Calculate
ARR Analyse ARR results Evaluate ARR method
Slide 3
Starter Explain what the payback method calculates. Explain two
benefits of the payback method. Explain two drawbacks of payback
method.
Slide 4
ARR Definition Average Rate of Return assesses the merits of an
investment by calculating the average annual profit as a percentage
of the initial investment.
Slide 5
Step 1 Calculate the average annual profit by adding up all net
cash flows divided by the number of years. Average annual profit =
Total net cash flow / Number of Years
Step 2 Divide the average annual profit by the initial
investment and show as percentage. ARR = (Average Annual
Profit/Initial Investment) x 100
Slide 8
Step 2 ARR = (76,500/750,000) x 100 = 10.2% The ARR for machine
A is 10.2 %
Slide 9
Machine B Calculate the ARR for machine B. Show all
calculations and formulas in your working out. Make everything
obvious to the examiner!
Slide 10
Analysis and Evaluation of ARR Higher the ARR the more
potentially profitable the investment. Analyse machine As and
machine Bs ARR.
Slide 11
Evaluation: Benefits & Drawbacks Discuss the benefits and
drawbacks of ARR method. Consider: Interest Rates and lending ROCE
Cash Inflows Comparisons
Slide 12
Evaluation: Benefits Easy comparison with other forms of
investment Can compare with interest rate Compared to current or
target ROCE figure
Slide 13
Evaluation: Drawbacks Does not take into account specific
timings of cash inflows. An investment may appear profitable, but
if it takes four years before a positive net cash flow is achieved
this might threaten the firms short term survival