INTERPRETING ARR

Question 1

What is ARR (average rate of return)

Answer 1

ARR (average rate of return) calculates average annual profit generated by a project as a percentage of the initial investment.

Question 2

What is the formual for working out ARR

Answer 2

Formula = Average annual return divided by the initial outlay X 100

Question 3

What are the steps to calculating ARR

Answer 3

1 - Calcultae profit over lifetime of project: Total inflow - total outflow

2 - Divide profit by lifetime of project to give average annual profit = Average annual profit = profit / lifetime of project

3 - Apply ARR formula = average avvual return divided by the initial outlay X 100

Question 4

What are some key things you need to know for ARR to be effective

Answer 4

The higher the rate the better (the higher the profitability of a project makes it more attractive, good way to compare also)

Businesses would want to see a significantly higher return than the interest rate (

Reward for risk = ARR minus interest rate

I.E 8.5% - 1.5% = 7% reward for risk

Question 5

What are the pros of ARR

Answer 5

Focused on profitability rather than jush payback

Focuses on lifetime of project

Can be used to compare the profitability of different potential investments