1. Investment Appraisal - ARR
3.3 Decision-making techniques

2. What you need to know
b) Average (Accounting) Rate of Return

3. Concept links
ARR

4. What is Investment Appraisal?

5. Three Main Methods of Investment Appraisal
Payback Period
Average Rate of Return
Discounted Cash Flow (NPV)

6. What is the Annual Average Return (ARR)

7. How to Calculate & Interpret ARR
Step 1:
Step 2:
Step 3:

8. A Simple Example of ARR Initial Outlay £1,000,000
A fashion retailer is planning to open 5 new stores next year. The annual profits for these stores and the initial outlay (shop fitting etc.) is shown in the table opposite.
The target rate of return is 20%
What is the ARR for the 5 new stores?
Initial Outlay
£1,000,000
Year
Annual Profit (£) 1
100,000 2
250,000 3
400,000 4
500,000 5

9. Calculating the ARR (1) Step 1: Average Annual Profit =
Total profits ________________________
Divided by
Number of Years
Average Annual Profit

10. Step 2: Divide average annual profit by the initial outlay
Calculating the ARR (2)
Step 2: Divide average annual profit by the initial outlay

11. Step 3: Compare the ARR with the target return
Calculating the ARR (3)
Step 3: Compare the ARR with the target return
ARR:
35%
Target
20%

12. Benefits of Using ARR…

13. Drawbacks of Using ARR…