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# Average Rate of Return Help watch

1. Hi I've come across a problem when doing some ARR revision. Below is some workings from the Jan 08 Unit 4 exam, with a question that asks me to calculate the ARR:

Investment: £4,000,000

--------|-Net Cash Flow---|-Cumulative Cash Flow
Year 1.-|-£1,000,000------|--£1,000,000
-----2.-|-£2,000,000------|--£3,000,000
-----3.-|-£3,000,000------|--£6,000,000
-----4.-|-£1,500,000------|--£7,500,000
-----5.-|-£500,000--------|--£8,000,000

8,000,000 (lifetime profit) [divided by] 5 years
= 1,600,000
= 1,600,000 [divided by] 4,000,000 (investment)
= 0.4
x 100
= 40%

If someone could tell me what I've done wrong it would be great, the mark scheme says the answer is 20%

Paper: http://www.aqa.org.uk/qual/gceasa/qp...W-QP-JAN08.PDF
Mark Scheme: http://www.aqa.org.uk/qual/gceasa/qp...W-MS-JAN08.PDF
2. I sat that exam in January this year and scraped 75 ums out of 90 .... ahh memories!

Anyway:

ARR = Revenue Generated / (Initial Investment x Number of years)

= 8,000,000 / (4,000,000 x 5)

= 8/20 = 0.4

Therefore 40% return (income) on investment

Adjustment: Cash outflows = 1/2 cash inflows

50% of 40% = 0.5 x 0.4 = 0.2 (i.e. 20%)
3. (Original post by IanDangerously)
Therefore 40% return (income) on investment

Adjustment: Cash outflows = 1/2 cash inflows

50% of 40% = 0.5 x 0.4 = 0.2 (i.e. 20%)
Thanks once again. I'm still trying hard to comprehend why you half the final percentage. Yes I read that the cash outflows are 1/2 the inflows, but all I used that for was was to actually work out the NCF. ARR isn't a cash outflow (?) so why half it.

Anyway I'll probably be able to work it out when I have the time ^^

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