Investment Projects (AQA GCSE Business)
Revision Note
Types of Investment Projects
Over time, businesses need to buy or upgrade assets such as machinery, vehicles or property
Businesses may need to buy, renovate, upgrade or extend land and buildings to house their operations
Examples include factories, office space, retail stores and warehouses
Owning the land and buildings gives them control over these spaces
Machinery such as production lines, tools and IT equipment are used in manufacturing and administration processes
Initial investments in machinery, as well as upgrades, help to reduce average production costs, increase quality and maintain efficiency
Businesses also make investments in research and development activities, including:
Market research
Inventing new materials and processes
Developing prototypes
Beta testing
Test marketing
Calculating the Average Rate of Return
The Average Rate of Return helps a business determine whether an investment will be worthwhile
It compares the average profit generated each year by an investment with the cost of the investment
It is expressed as a percentage and calculated using the formula:
The higher the outcome, the greater the return on investment
Investments with high average rates of return are more worthwhile than those with lower rates
Worked Example
Creative Frames, a small artwork framing business based in Bermuda, is considering an investment of $40,000 in new machinery. Megan, the business owner, believes that total returns over a 6-year period will be $76,000
Calculate the Average Rate of Return of the proposed investment. [4 marks]
Step 1: Deduct the cost of the investment from the total forecasted returns
$76,000 - $40,000 = $36,000 [1]
Step 2: Divide the outcome by the number of years of use to determine the average yearly profit
$36,000 ÷ 6 years = $6,000 [1]
Step 3: Substitute the values into the ARR formula
[1]
Step 4: Multiply the outcome by 100 to find the percentage
0.15 x 100 = 15% [1]
Evaluation of Average Rate of Return (ARR)
Advantages | Disadvantages |
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Examiner Tip
Make sure that you include all of your workings in calculation questions. The Own Figure Rule (OFR) means that even if part of your answer is incorrect, you can still receive some marks.
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