Average Rate of Return
A business has money to invest and two options to choose from. The average rate of return turns each one into a single percentage, so they can be compared. Learn to calculate it, and where it falls short.
Revise this, the fun way
Play it interactively, earn XP and build a streak, free.
Start revising freeWhat you'll cover
Which investment wins? 📈
Imagine a business has 10000 pounds to invest and two options to choose from. Which one is the better bet? The **average rate of return** turns each option into a single percentage so they can be compared. This module is about calculating the average rate of return and knowing its limits.
Words to know 🔑
Four ideas run through this topic:
What is it for? 🎯
What does the average rate of return help a business to do?
- Compare investments and choose the best one
- Pay its staff their wages
- Work out the tax it owes
- Design an advertising campaign
Two steps ⚖️
The average rate of return is worked out in two steps.
Average the profit 🔢
An interactive activity.
What ARR misses 📉
The average rate of return is useful, but it has limits. It ignores the timing of the returns, so a profit far in the future counts the same as one next year. It ignores the risk of the investment, and it is based on forecast profits that may turn out to be wrong. So use it alongside other information.
Reading the number ✅
Which THREE are limitations of the average rate of return?
- It ignores the timing of the returns
- It ignores the risk of the investment
- It is based on forecasts that may be wrong
- It is always exactly right
- It measures staff morale
Now the ARR 🧮
An interactive activity.
Match the meaning 🔗
- Average rate of return
- Average annual profit
- Investment appraisal
- A higher ARR
- The average yearly return as a percentage of cost
- Total profit divided by the number of years
- Comparing investments to choose the best
- Usually the more attractive investment
In the right order 🪜
An interactive activity.
Complete the idea 🧩
The average rate of _____ compares investments. First find the average annual _____ by dividing the total profit by the number of _____. Then divide by the _____ of the investment and multiply by 100. A _____ ARR is usually the better choice.
True or not? 🖍️
An interactive activity.
Make the call 🧭
An interactive activity.
Recommend it ✍️
An interactive activity.