ARR and financial terms and calculations

Question 1

What is a business investment?

Answer 1

When money is used to purchase an asset that is expected to generate a return of income or profit.

Question 2

What are some examples of business investments?

Answer 2

• New machinery - Make processes more efficient

*New vehicles
*Land and buildings

Question 3

What is ARR?

Answer 3

Average rate of return is a way of comparing profitability of different choices over expected life of investment

Question 4

What is the formula for calculating ARR?

Answer 4

AVERAGE ANNUAL PROFIT ÷ INITIAL INVESTMENT
× 100

Question 5

What does a higher ARR mean?

Answer 5

The higher the ARR , the better
*Means that investment will generate a higher return than the money spent on investment

Question 6

What are costs?

Answer 6

Spending that occurs to set up and run business

Question 7

What is the difference between fixed and variable costs?

Answer 7

Fixed costs are costs that stay the same and DON’T change with level of output
Whereas variable costs change with level of output

Question 8

What is variable costs?

Answer 8

As input increases,so does output

Question 9

How do you work out total costs?

Answer 9

Total costs are fixed costs PLUS variable costs

Question 10

Why is it important to forecast cash flow?

Answer 10

Cash is the lifeblood of a business. (1)
If a business runs out of cash,
it’ll be unable to pay suppliers,overheads and employers (1)
and may be insolvent leading to business failure (1)