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Average Rate of Return

Source: Procurement Glossary
Author: Paul Rogers
Institute: CIPS - UK

Courtesy of


Average Rate of Return [or Accounting Rate of Return] is one of the ratios sometimes used in investment appraisal.  It calculates the returns from an investment over the period of the investment expressed as a percentage of the original sum invested.  As an example, a new machine costs $100,000 and generates net cash flow of $50,000 each year over the four years of its expected life.  The total return from the machine is $200,000 minus the original investment of $100,000 making a net return of $100,000.  To calculate the net return per annum, $100,000 is divided by four (being the expected life of the machine in years) that equates to $25,000 per annum.  Expressed as a percentage of the capital cost, the average rate of return is 25%. As it does not take into account the time value of money, Net Present Value [NPV] is more commonly used.  See also Net Present Value.



















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