A project costs £80,000 and brings total net inflows of £112,000 over 4 years. Calculate its ARR.

The ARR is 10%. The working is £112,000 − £80,000 = £32,000, then £32,000 ÷ 4 = £8,000, then 8,000 ÷ 80,000 × 100 = 10%.

Give one advantage and one disadvantage of the average rate of return.

ARR uses every year's figures and gives a percentage that is easy to compare with interest rates. ARR ignores the timing of cash flows and the time value of money.

Why should a project's ARR be compared with the interest rate on borrowing?

A project funded by a loan must earn more than the loan costs. An ARR of 6% is poor if the loan charges 8%.

CCEA A-Level Professional Business Services 3210

The Business Environment

Topic overview Primary, secondary, tertiary and quaternary production Private, public and voluntary sector objectives Sole traders and partnerships Private and public limited companies Stakeholder interests and conflicts Factors of production

The Professional Business Services Sector

Topic overview The nature of professional business services The range of consultancy services Tangible goods and intangible services Local, national and global firms Why businesses use consultancy services

The Consultancy Process

Topic overview The consultancy process and the entry phase The diagnosis phase The action planning phase Implementation and termination phases

Understanding the Client's Market

Topic overview Market size, market share and market growth Reasons for market research and using its findings Primary market research methods Secondary market research and choosing a method Sampling methods in market research Market segmentation

Client Relationships

Topic overview Why client relationships matter Communication, personal contact and client needs Business culture and professionalism Trust, ethical behaviour, intellect and ideas

Business Ethics

Topic overview Fairness, integrity and freedom from bias Trust, confidentiality, transparency and openness The benefits of an ethical code

Persuading, Negotiating and Influencing

Topic overview Persuasion techniques for consultants Negotiation stages and strategies Influencing clients and stakeholders

Business Planning and Risk Management

Topic overview Strategic planning and cost–benefit analysis SWOT and PESTEL analysis in strategic planning The Ansoff matrix and the Boston matrix Assessing and managing business risk

Government Regulation

Topic overview The purpose of business regulation Regulators and compliance in Northern Ireland Codes of conduct versus external regulation

Organisational Structure and Culture

Topic overview Human resources and effective HR management Tall, flat, centralised and decentralised structures Roles, chain of command, span of control and delayering Changing and comparing organisational structures Culture, Schein's model and the McKinsey 7S framework

Recruitment and Selection

Topic overview Internal and external recruitment methods Job descriptions and person specifications Interviews and psychometric testing Competency profiling, situational judgement tests and EI questionnaires Contracts of employment and effective recruitment

Learning and Development

Topic overview Why learning and development matters to a business Induction, on-the-job, off-the-job training and CPD Outcomes of learning and development

Employee Well-Being and Motivation

Topic overview What employee well-being is and why employers value it Methods of supporting employee well-being Causes of low workplace well-being Maslow and Taylor on motivation Herzberg and Mayo on motivation Financial and non-financial methods of motivation

Managing Conflict

Topic overview Functional and dysfunctional conflict Causes of conflict at work Effects of conflict on performance, motivation and behaviour Improving employer–employee relations

Business Research Methods

Topic overview Research aims, objectives and literature searches Questionnaires, interviews and designing research tools Sampling, reliability, validity and research ethics Presenting, analysing and evaluating research findings

Sources of Finance

Topic overview Financial decision making in a client business Internal sources of finance Loans, overdrafts and share issues Leasing, hire purchase and trade credit Choosing the right source of finance

Cash Flow

Topic overview Types of budget and why firms set them Adverse and favourable variances Cash flow, profit and why firms forecast Constructing and analysing a cash flow forecast

Financial Statements

Topic overview Revenue, cost of sales and gross profit Expenses and net profit Assets on the statement of financial position Equity and liabilities

Ratio Analysis

Topic overview Profit margins and return on capital employed The current ratio, liquidity and gearing Trade receivables and trade payables days Earnings per share and return on equity Using and evaluating ratio analysis

Investment Appraisal and Financial Decisions

Topic overview The payback method Net present value and discounting Average rate of return and choosing a method Appraising an investment for a client Using financial data for growth and staffing decisions

IT Systems and Communication Technology

Topic overview The role of technology in business Management information and performance management systems Choosing and integrating IT systems Email, messaging, telephone and text Websites, document sharing, conferencing and social media

Technology for People and Operations

Topic overview Performance management software HR information systems Customer relationship management software Transaction processing technology Inventory management technology

Technology for Finance and Disaster Recovery

Topic overview Spreadsheets for financial decisions Databases and accounting software Data security principles and cyber threats SSL, HTTPS and two-factor authentication Legislation on data and technology Disaster recovery planning and backup strategies

Big Data and the Ethics of Technology

Topic overview Big data, data analytics and KPIs Data storage systems Automated decisions, censorship and monitoring Personal data, the digital divide and acceptable use

Leadership and Management

Topic overview Leadership, management and emotional intelligence Fayol's functions and Mintzberg's roles The Tannenbaum–Schmidt continuum and leadership styles Transformational and transactional leadership The Blake Mouton grid and Adair's Action-Centred Leadership Performance management and review

Managing Teams

Topic overview Team working and Tuckman's stages Belbin's nine team roles Using and evaluating Belbin's model

Managing Change

Topic overview Reasons for change in the business environment Resistance to change Lewin, Kotter and Galbraith's change models Benefits and challenges of managing change

Project Management and Feasibility

Topic overview What a project is and why project management matters Project roles and responsibilities Project documents, plans and registers Client needs and feasibility research The business case and the project brief

Project Initiation and Planning

Topic overview The initiation stage and the project initiation document Project tolerances for time, cost, quality and risk The planning stage: scope, objectives and deliverables Resources, roles, quality and financial plans Gantt charts, risk plans and the stage review

Project Closure and Evaluation

Topic overview Monitoring and reviewing a project during execution Closing a project Evaluating a project and gathering stakeholder feedback

Investment Appraisal and Financial Decisions

Average rate of return and choosing a method

3 things to know
AS 3

Overview

The average rate of return and its formula with worked calculations, choosing between payback, ARR and NPV, sensitivity analysis and non-financial factors.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Numbers

A Lisburn IT firm spends £40,000 on a project returning £18,000, £20,000 and £22,000 over three years. Calculate its ARR.

Key term

What is the average rate of return?

Numbers

State the formula for the average rate of return.

Questions from this subtopic

Each one with the model answer underneath.

1
What is the average rate of return?
Model answer
The average rate of return shows a project's average yearly profit as a percentage of its initial cost. A higher ARR means a more profitable project.
2
State the formula for the average rate of return.
Model answer
ARR equals average annual profit divided by the initial investment, multiplied by 100. Average annual profit is total net inflows minus the cost, divided by the number of years.
3
A project costs £80,000 and brings total net inflows of £112,000 over 4 years. Calculate its ARR.
Model answer
The ARR is 10%. The working is £112,000 − £80,000 = £32,000, then £32,000 ÷ 4 = £8,000, then 8,000 ÷ 80,000 × 100 = 10%.
4
A Lisburn IT firm spends £40,000 on a project returning £18,000, £20,000 and £22,000 over three years. Calculate its ARR.
Model answer
The ARR is 16.7%. The working is £60,000 − £40,000 = £20,000, then £20,000 ÷ 3 = £6,667. The ARR is 6,667 ÷ 40,000 × 100 = 16.7%.
5
Give one advantage and one disadvantage of the average rate of return.
Model answer
ARR uses every year's figures and gives a percentage that is easy to compare with interest rates. ARR ignores the timing of cash flows and the time value of money.
6
Why should a project's ARR be compared with the interest rate on borrowing?
Model answer
A project funded by a loan must earn more than the loan costs. An ARR of 6% is poor if the loan charges 8%.

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Understanding the Client's Market

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