AQA Business ARR: Please Help!Watch
Forecast initial cost: £8m
Expected returns |Cash Inflow £M|Cash outflow £m
1 |3.0 |1.5
2 |5.7 |2.0
3 |6.5 |2.2
4 |7.4 |3.9
Using the data in Appendix A, calculate the average rate of return (ARR) for the car
club proposal and analyse your results in relation to the Directors’ expectations.
This is a question we have been given and all of us have different answers as we arent sure how to work it out.
Can anyone please help?
3 + 5.7 + 6.5 + 7.4 - 1.5 - 2.0 - 2.2 - 3.9 = 13
Then minus the investment cost
13 - 8 = 5
Then, to find average cash flow, divide by the number of years
5/4 = 1.25
Then divide by the cost of investment and times by 100 to get the percentage
1.25/8 x 100 = 15.625%
So you take inflow (money in) minus outflow (money out) = profit.
Add up the profit for each year, take off the initial investment, divide by the number of years = average profit.
Average profit divided by investment x 100 = ARR as a percentage.
Also,when I was doing BUSS3, we always got told to have a 'Year 0' with the initial investment, just to make sure that in the exam we didn't forget to take it off