2.4.4
Rate of Return
Average Rate of Return
Average Rate of Return
Average rate of return (ARR) is a way of measuring how good an investment project is for a business.


Average rate of return
Average rate of return
- It is calculated by working out the average profit the firm makes from the project per year as a percentage of the initial investment.
- The higher the ARR is, the better a project is for a business. This is because they are making a higher proportion of their investment back each year.


Average rate of return
Average rate of return
- If a firm invests £100,000 in new machinery which lowers its costs by £20,000 per year for 10 years.
- Total net profit (for all 10 years) = 20,000 x 10 – 100,000 = £100,000.
- Project length = 10 years.
- Average profit made each year = 100,000/10 = 10,000.
- Then simply divide this by initial investment to calculate it as a %.
- ARR (%) = 10,000/100,000 x 100 = 10%.
1Investigating Small Business
1.1Enterprise & Entrepreneurship
1.2Spotting a Business Opportunity
1.2.1Customer Needs
1.2.2Market Research
1.2.3Market Segmentation
1.2.4The Competitive Environment
1.2.5Primary & Secondary Market Research
1.2.6End of Topic Test - Business Opportunities
1.2.7Application Questions - Business Opportunities
1.2.8Exam-Style Questions - Market Segmentation
1.2.9Diagnostic Misconceptions - Competition
1.3Putting a Business Idea into Practice
1.3.1Business Aims
1.3.2Business Objectives
1.3.3Business Revenues & Costs
1.3.4Costs - Calculations
1.3.5Revenue - Calculations
1.3.6Business Profits & Break-Even Analysis
1.3.7Profits & Losses - Calculations
1.3.8Interest - Calculations
1.3.9Cash & Cash Flow
1.3.10Cash & Cash Flow 2
1.3.11Cash Flow - Calculations
1.3.12Sources of Business Finance
1.3.13End of Topic Test - Business in Practice
1.3.14Grade 9 - Business in Practice
1.3.15Exam-Style Questions - Business in Practice
1.3.16Diagnostic Misconceptions - Profit
1.3.17Diagnostic Misconceptions - Company vs Business
1.3.18Diagnostic Misconceptions - Economies of Scale
1.3.19Diagnostic Misconceptions - Cash Flow
1.3.20Diagnostic Misconceptions - Break-even
1.3.21Diagnostic Misconceptions - Fixed Costs
1.4Making the Business Effective
1.5Business Stakeholders
2Building a Business
2.1Growing the Business
2.2Making Marketing Decisions
2.2.1Product
2.2.2Product Life Cycle
2.2.3Price
2.2.4Pricing Methods
2.2.5End of Topic Test - Product & Price
2.2.6Grade 9 - Product & Price
2.2.7Promotion & Advertising
2.2.8PR & Sales Promotions
2.2.9Sponsorship & Product Placement
2.2.10Promotional Mix
2.2.11End of Topic Test - Promotion
2.2.12Application Questions - Promotion
2.2.13Exam-Style Questions - Promotional Mix
2.2.14Place & Wholesalers
2.2.15Direct to Consumer
2.2.16E-commerce & M-commerce
2.2.17Diagnostic Misconceptions - Decreasing Price
2.2.18Diagnostic Misconceptions - Advertise vs Promote
2.2.19Diagnostic Misconceptions - Social Media
2.3Making Operational Decisions
2.3.1Job Production
2.3.2Batch & Flow Production
2.3.3Working with Suppliers
2.3.4Effective Supply Chains
2.3.5Just In Time & Just In Case
2.3.6Managing Quality
2.3.7Total Quality Management
2.3.8The Sales Process
2.3.9End of Topic Test - Operational Decisions
2.3.10Grade 9 - Operational Decisions
2.3.11Exam-Style Questions - Managing Stock
2.3.12Diagnostic Misconceptions - JIT vs JIC
2.4Making Financial Decisions
2.5Making Human Resource Decisions
2.5.1Organisational Structures
2.5.2Organisational Structures 2
2.5.3Recruitment
2.5.4Effective Recruitment
2.5.5Training a Workforce
2.5.6Motivating a Workforce
2.5.7End of Topic Tests - Human Resources
2.5.8Application Questions - Human Resources
2.5.9Exam-Style Questions - Human Resources
2.5.10Diagnostic Misconceptions - Owners vs Shareholders
2.5.11Diagnostic Misconceptions - Internal Recruitment
2.5.12Diagnostic Misconceptions - Employee Motivation
Jump to other topics
1Investigating Small Business
1.1Enterprise & Entrepreneurship
1.2Spotting a Business Opportunity
1.2.1Customer Needs
1.2.2Market Research
1.2.3Market Segmentation
1.2.4The Competitive Environment
1.2.5Primary & Secondary Market Research
1.2.6End of Topic Test - Business Opportunities
1.2.7Application Questions - Business Opportunities
1.2.8Exam-Style Questions - Market Segmentation
1.2.9Diagnostic Misconceptions - Competition
1.3Putting a Business Idea into Practice
1.3.1Business Aims
1.3.2Business Objectives
1.3.3Business Revenues & Costs
1.3.4Costs - Calculations
1.3.5Revenue - Calculations
1.3.6Business Profits & Break-Even Analysis
1.3.7Profits & Losses - Calculations
1.3.8Interest - Calculations
1.3.9Cash & Cash Flow
1.3.10Cash & Cash Flow 2
1.3.11Cash Flow - Calculations
1.3.12Sources of Business Finance
1.3.13End of Topic Test - Business in Practice
1.3.14Grade 9 - Business in Practice
1.3.15Exam-Style Questions - Business in Practice
1.3.16Diagnostic Misconceptions - Profit
1.3.17Diagnostic Misconceptions - Company vs Business
1.3.18Diagnostic Misconceptions - Economies of Scale
1.3.19Diagnostic Misconceptions - Cash Flow
1.3.20Diagnostic Misconceptions - Break-even
1.3.21Diagnostic Misconceptions - Fixed Costs
1.4Making the Business Effective
1.5Business Stakeholders
2Building a Business
2.1Growing the Business
2.2Making Marketing Decisions
2.2.1Product
2.2.2Product Life Cycle
2.2.3Price
2.2.4Pricing Methods
2.2.5End of Topic Test - Product & Price
2.2.6Grade 9 - Product & Price
2.2.7Promotion & Advertising
2.2.8PR & Sales Promotions
2.2.9Sponsorship & Product Placement
2.2.10Promotional Mix
2.2.11End of Topic Test - Promotion
2.2.12Application Questions - Promotion
2.2.13Exam-Style Questions - Promotional Mix
2.2.14Place & Wholesalers
2.2.15Direct to Consumer
2.2.16E-commerce & M-commerce
2.2.17Diagnostic Misconceptions - Decreasing Price
2.2.18Diagnostic Misconceptions - Advertise vs Promote
2.2.19Diagnostic Misconceptions - Social Media
2.3Making Operational Decisions
2.3.1Job Production
2.3.2Batch & Flow Production
2.3.3Working with Suppliers
2.3.4Effective Supply Chains
2.3.5Just In Time & Just In Case
2.3.6Managing Quality
2.3.7Total Quality Management
2.3.8The Sales Process
2.3.9End of Topic Test - Operational Decisions
2.3.10Grade 9 - Operational Decisions
2.3.11Exam-Style Questions - Managing Stock
2.3.12Diagnostic Misconceptions - JIT vs JIC
2.4Making Financial Decisions
2.5Making Human Resource Decisions
2.5.1Organisational Structures
2.5.2Organisational Structures 2
2.5.3Recruitment
2.5.4Effective Recruitment
2.5.5Training a Workforce
2.5.6Motivating a Workforce
2.5.7End of Topic Tests - Human Resources
2.5.8Application Questions - Human Resources
2.5.9Exam-Style Questions - Human Resources
2.5.10Diagnostic Misconceptions - Owners vs Shareholders
2.5.11Diagnostic Misconceptions - Internal Recruitment
2.5.12Diagnostic Misconceptions - Employee Motivation
Unlock your full potential with Seneca Premium
Unlimited access to 10,000+ open-ended exam questions
Mini-mock exams based on your study history
Unlock 800+ premium courses & e-books