Average Rate of Return
The average rate of return is a financial metric used to measure the gain or loss on an investment over a specified period, expressed as a percentage. It is calculated by dividing the total return on the investment by the initial investment amount. This metric helps businesses assess the profitability and performance of their investments.
4 Key excerpts on "Average Rate of Return"
eBook - ePubBusiness
The Ultimate Resource
- Bloomsbury Publishing(Author)
- 2011(Publication Date)
...Calculating Rate of Return WHAT IT MEASURES The annual return on an investment, expressed as a percentage of the total amount invested. It also measures the yield of a fixed-income security. WHY IT IS IMPORTANT Rate of return is a simple and straightforward way to determine how much investors are being paid for the use of their money, so that they can then compare various investments and select the best—based, of course, on individual goals and acceptable levels of risk. Rate of return has a second and equally vital purpose: as a common denominator that measures a company’s financial performance, for example in terms of rate of return on assets, equity, or sales. HOW IT WORKS IN PRACTICE There is a basic formula that will serve most needs, at least initially: [(current value of amount invested – original value of amount invested) / original value of amount invested] × 100 percent = rate of return If $1,000 in capital is invested in stock, and one year later the investment yields $1,100, the rate of return of the investment is calculated like this: [(1100 – 1000) / 1000)] × 100 percent = 100 / 1000 × 100 percent = 10 percent rate of return Now, assume $1,000 is invested again. One year later, the investment grows to $2,000 in value, but after another year the value of the investment falls to $1,200...
eBook - ePub- Chris Guilding, Kate Mingjie Ji(Authors)
- 2022(Publication Date)
- Routledge(Publisher)
...In the earlier chapter concerned with budgeting, it was noted that the ‘budget’ relates to plans for the forthcoming year. It follows that ‘capital budgeting’ relates to longer-term budgeting, that is, decision-making concerned with investing in fixed assets such as laundry or kitchen equipment or the decision to refurbish rooms. As a large proportion of a hotel’s assets are fixed assets, it is evident that capital budgeting is an important decision-making area for hotel managers. The chapter is structured around the following four investment appraisal techniques: accounting rate of return, payback, net present value, internal rate of return. 2 Accounting rate of return A worked example that highlights the calculation of the accounting rate of return is presented in Box 14.1. BOX 14.1 Finding an investment proposal’s accounting rate of return The accounting rate of return (ARR) can be found by applying the following formula: ARR = Average annual profit generated by the investment Average investment Usually, ARR is stated as a percentage; therefore, multiply the previous formula by 100. Imagine Auckland’s KiwiStay Hotel is appraising a 1st January 20X0 investment of $8,000 in a drink vending machine that will increase accounting profits by $1,000 in 20X0, $2,000 in 20X1 and $3,000 in 20X2. At the end of 20X2, it is estimated the vending machine will be sold for $2,000. Calculating the average annual profit generated by the investment is relatively straightforward. We find it is $2,000 by taking the average of the profit generated in years 20X0, 20X1 and 20X2 ([$1,000 + $2,000 + $3,000] ÷ 3). The average investment is a slightly more challenging concept to grasp, however. Try thinking of it as ‘The average amount of money invested in the asset during its life’. At the beginning of 20X0, it is evident that $8,000 is invested in the asset (i.e., the initial investment)...
eBook - ePub- Bijan Vasigh, Javad Gorjidooz(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
...In addition, the chapter presents the possibility of multiple rates of return existing and describes the use of modified rate of return analysis. ◆ Rate of Return Calculation ○ Interpretation of Rate of Return Values ○ Trial and Error Method ◆ Rate of Return of Bonds ◆ Evaluating Mutually Exclusive Projects ○ Incremental Cash Flows ○ Cost-based Alternatives ○ Revenue-based Alternatives ○ Equal-life Service Requirement ◆ Evaluating Independent Projects ◆ Complications with Rate of Return ○ Multiple Rates of Return Scenario ○ ROR Reinvestment Rate Assumption ○ Modified Rate of Return Analysis ◆ Using Spreadsheets for Rate of Return Computation ◆ Summary ◆ Discussion Questions and Problems Rate of Return Calculation Rate of return (ROR) analysis is used often by professional engineers and investors to evaluate the rate of return of their investments in a single asset or security, a portfolio of assets or securities, or mutual funds. Newnan (Newnan et al. 2012) defines rate of return as the interest rate at which the present worth and the annual worth are equal to zero. But Blank (Blank and Tarquin 2014) defines rate of return as “the rate paid on the unpaid balance of borrowed money, or the rate earned on the uncovered balance of an investment, so that the final payment or receipt brings the balance to exactly zero with interest considered.” Aviation Snippet Airlines have been a serial killer of capital. We have done a good job for consumers of selling our product at less than cost. In our view the industry is a giant charity. John Owen, JetBlue In this book, the ROR, which is also called internal rate of return (IRR), is defined as the interest rate (i *) that sets present worth of all cash flows, both inflows and outflows, to zero...
eBook - ePub- Robert Irons(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...This principle is clearly seen when calculating expected returns using the Security Market Line. PR3 examines the inverse relationship between value and the risk, while PR1 describes the inverse relationship between value and the discount rate. These two precepts are linked by the direct relationship between risk and return, since the return to shareholders is used as the discount rate for valuing the firm’s common shares. Measuring Return The percentage return (or yield) on an investment is measured as the change in the value of the investment over the time period in question, plus any cash flows from the investment, divided by the value of the investment at the beginning of the time period. The numerator of this fraction is the dollar return on the investment, and dividing the dollar return by the beginning price makes it a percentage return (a percentage of the price). Stocks and bonds both have cash flows that occur during the year: dividends for stocks and interest payments for bonds. Typically, when people in finance refer to returns, they are referring to percentage returns, not dollar returns. Percentage returns indicate the size of the return relative to size of the investment, and therefore can be used to compare returns for different investments, regardless of the amount invested. For example, suppose you and your best friend both invested for one year, each in a different stock. At the end of the year, you had earned $1,000 on your investment, while your friend had earned $500 on hers. Which of you did better? The correct answer is it depends on how much each of you invested. If you invested $5,000, while your friend invested $1,000, then she earned a 50% return while you only earned a 20% return...
