Topic 2.4 Making Financial Decisions Flashcards
formula for gross profit
Gross profit = Sales revenue - cost of sales
gross profit
the difference between the revenue of the business and the variable costs
net profit
the difference between revenue and total costs
net profit formula
Net profit = Gross profit - (operating expenses + Interest)
profit margin
A profit margin is the amount by which the sales revenue exceeds the costs
gross profit margin
This shows the proportion of revenue that is turned into gross profit and is expressed as a percentage
gross profit margin formula
gross profit margin (%) = 100 x gross profit/sales revenue
net profit margin
The net profit margin shows the proportion of revenue that is turned into net profit before tax and is expressed as a percentage
net profit margin formula
net profit margin (%) = 100 x net profit/sales revenue
average rate of return (ARR)
The average rate of return (ARR) measures the annual expected profit from a proposed capital project
capital project
a long-term, capital-intensive investment to build upon, add to, or improve a capital asset
Capital projects typically involve large-scale projects on the higher-end of expenditures compared to those requiring fewer resources. Some examples of capital projects include roads, railways, manufacturing plants, nuclear power plant construction, power transmission, and electrical distribution.
when is ARR used
ARR is used when a decision is required about which of two projects should be pursued in order to generate the most profit
average rate of return (ARR) formula
ARR = 100 x average annual profit/cost of investment
outlay
the amount of money spent on something
Opportunity cost
The loss of other alternatives when one alternative is chosen
