ExpertHard5 marksStructured
AQA GCSE · Question 03.5 · Finance
Using Item D, calculate the average rate of return for the new equipment if Emilios purchases it.
State the formula for the average rate of return and show your workings.
Using Item D, calculate the average rate of return for the new equipment if Emilios purchases it.
State the formula for the average rate of return and show your workings.
How to approach this question
This is a 5-mark calculation question with specific instructions.
1. **State the formula** for Average Rate of Return (ARR). This is usually worth 1-2 marks. Formula: ARR = (Average annual profit / Cost of investment) x 100.
2. **Calculate the Average Annual Profit.** Find the total profit (£28,800) and the lifetime of the asset (8 years) from Item D. Divide the total profit by the number of years.
3. **Identify the Cost of Investment.** Find the cost of the equipment (£12,000) from Item D.
4. **Substitute** the values into the ARR formula and calculate the final percentage.
Full Answer
**Formula:**
Average Rate of Return (ARR) = (Average annual profit / Cost of investment) x 100
**Workings:**
1. **Calculate Average Annual Profit:**
- Total additional profit = £28,800
- Estimated life of equipment = 8 years
- Average annual profit = £28,800 / 8 = £3,600
2. **Calculate ARR:**
- Cost of investment = £12,000
- ARR = (£3,600 / £12,000) x 100
- ARR = 0.3 x 100 = 30%
**Answer:** 30%
The Average Rate of Return (ARR) is a financial ratio used to measure the profitability of an investment over its lifespan. It is expressed as a percentage.
- **Step 1: State the formula.**
ARR = (Average annual profit / Cost of investment) × 100.
- **Step 2: Find the values from Item D.**
- Total profit = £28,800.
- Lifespan = 8 years.
- Cost of investment = £12,000.
- **Step 3: Calculate the average annual profit.**
Average annual profit = Total profit / Lifespan
Average annual profit = £28,800 / 8 years = £3,600 per year.
- **Step 4: Calculate the ARR.**
ARR = (£3,600 / £12,000) × 100
ARR = 0.3 × 100 = 30%.
This means the investment is expected to return an average of 30% of its cost in profit each year.
Common mistakes
✗ Forgetting to calculate the *average annual* profit and using the total profit instead.
✗ Getting the formula wrong (e.g., dividing cost by profit).
✗ Forgetting to multiply by 100 to express the answer as a percentage.
Practice the full AQA GCSE Business Paper 2
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