Average Rate of Return (ARR) (DP IB Business Management: SL): Revision Note

Creative Frames, a small artwork framing business based in Bermuda, is considering an investment of $40,000 in new machinery. Megan, the business owner, believes that total returns over a 6-year period will be $76,000

Calculate the Average Rate of Return of the proposed investment.   [4 marks]

 Answer:

Step 1 - Deduct the capital cost from the total returns

$76,000 - $40,000   =   $36,000    [1 mark]

Step 2 - Divide the outcome by the number of years of use

$36,000 ÷ 6 years      =      $6,000     [1 mark]
 

Step 3 - Substitute the values into the formula

$$\begin{gathered} =\frac{6,000}{40,000}\mathrm{x}100 \\ =0.15 \end{gathered}$$   [1 mark]

Step 4 - Multiply the outcome by 100 to find the percentage

    0.15 x 100      =      15%     [1 mark]