Investment Appraisal: Average Rate of Return

• Average rate of return is a method of investment appraisal
• It calculates the annual profit from a project as a percentage of the initial investment cost
• The steps to calculate the average rate of return include calculating the lifetime profit, dividing by the number of years, and converting to a percentage
• Average rate of return allows for clear comparisons of percentage returns and focuses on profitability

This module explains how to use the average rate of return as a method of investment appraisal. It involves calculating the lifetime profit earned from the investment, dividing it by the number of years the return is made over, and then converting the annual profit into a percentage of the initial investment cost. The average rate of return allows for comparisons of percentage returns and focuses on profitability. However, it has limitations such as relying on predictions for future cash flows and ignoring the timing of the cash flow.