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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