Understanding Average Rate of Return

What is the primary goal of businesses when making investment decisions?

• To expand globally

• To make a return on investment and increase profit

• To ensure employee satisfaction

• To increase market share

How does the average rate of return help businesses?

• By predicting future market trends

• By increasing employee productivity

• By evaluating the profitability of potential investments

• By reducing operational costs

What is the first step in calculating the ARR if the average annual profit is not provided?

• Estimate the total cost of the investment

• Calculate the total profit return from the investment

• Assess the market conditions

• Determine the investment period

In the fashion store example, what is the average annual profit from the investment?

• £5,000

• £25,000

• £20,000

• £10,000

Which oven option had a higher ARR in the bakery business scenario?

• Both had the same ARR

• Neither had a positive ARR

• The new oven

• The second-hand oven

What is a key advantage of using the ARR calculation?

• It is complex and requires expert knowledge

• It accounts for the time value of money

• It guarantees investment success

• It allows quick comparison of investment options

What is a limitation of the ARR calculation?

• It requires extensive data analysis

• It is difficult to understand

• It relies on the estimation of future profits

• It considers cash flows and market conditions

Why might the ARR not provide an accurate assessment of investment performance?

• It requires constant recalibration

• It does not consider the time value of money

• It includes too many variables

• It is only applicable to short-term investments

What does the ARR calculation fail to account for?

• The time value of money

• The initial cost of investment

• The total profit return

• The average annual profit

How can businesses use the ARR to make investment decisions?

• By assessing the viability of potential investments

• By predicting future economic conditions

• By ensuring immediate returns

• By eliminating all investment risks