Average Rate Of Return

Question 1

Formula- Average rate of return

Answer 1

Accumulated Profit / Years= Yearly Profit

Yearly Profit / Cost x 100 = ARR

Question 2

Advantages-Average rate of return

Answer 2

• Easy to understand and conduct
• Provides a percentage which is easily comparable
• Looks at the profitability of the project
• Focuses on how profitable the project could be

Question 3

Disadvantages-Average rate of return

Answer 3

• Is based on profit rather than cash flow so is affected by non-cash items like rate of depreciation
• Fails to take into account t of timing of profits
• Does not take into account inflation of a currency