Investment Projects Flashcards
All 6 cards in this deck
State one reason a business might invest in new machinery.
To increase output/productivity (or to improve the quality of the product).
State one reason a business might invest in new buildings.
To increase capacity — e.g. a bigger factory, extra shop or new warehouse allows more output or sales.
State one reason a business might invest in new vehicles.
To deliver goods to customers more quickly and reliably (and to cut maintenance/fuel costs of old vehicles).
What is the formula for the average rate of return (ARR)?
ARR = (average profit per year ÷ cost of investment) × 100
What are the steps to calculate the average rate of return?
e.g. an investment of £36 000 gives total profit of £45 000 over 5 years- Average profit per year = total profit ÷ number of years: £45 000 ÷ 5 = £9 000
- Divide by the cost of the investment: £9 000 ÷ £36 000 = 0.25
- Multiply by 100: ARR = 25%
When comparing two investment projects, which average rate of return figure is better?
The higher ARR — it gives a greater percentage return per year on the money invested.