average rate of return

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Average rate of return (ARR)

The ratio of the average cash inflow to the amount invested.

Average Rate of Return

The rate of return on an investment that is calculated by taking the total cash inflow over the life of the investment and dividing it by the number of years in the life of the investment. The average rate of return does not guarantee that the cash inflows are the same in a given year; it simply guarantees that the return averages out to the average rate of return.

average rate of return

One way of measuring an investment's profitability.To calculate,one takes the total net earnings,divides by the total number of years the investment was held,and then divides that answer by the investment's initial acquisition cost.

Example: Rainer spent $800,000 to buy an apartment building. After deducting all operat- ing expenses, real estate taxes, and insurance, she receives $65,000 in the first year, $71,000 in the second year, $69,000 in the third year, and $70,000 in the fourth year. The total net earnings are $275,000. Divide that number by the 4 years being analyzed, to reach $68,750 as an average annual return. Divide $68,750 by the initial $800,000 investment to calculate the average rate of return of 8.59 percent.

Drawback: The procedure does not take into account the time value of money.The $65,000 received in the first year was more valuable than the $70,000 received in the fourth year,because the $65,000 could have been invested to earn still more money.

References in periodicals archive ?
The key 10- and 20-year average rates of return were 8.
Market--community banks operating in rural markets enjoyed higher average rates of return than those in urban markets.
As a result, the CBSL has able to engage in foreign reserves management activities which have today gained wide recognition as it has been able to earn above average rates of return, during periods when the world interest rates have been at historic low levels.
During the past five years they had average rates of return of 10.
The North currently provides lower average rates of return on investment than the rest of the country.
Quarterly changes in the average rates of return for either type of buy-to-let investment are virtually unchanged at 0.
Quarterly changes in the average rates of return for either type of buy to let investment are virtually unchanged at 0.
Furthermore, while average rates of return fell during the period, fund performance was comparable to that of standard benchmarks for investment performance.
Third, the apparent differences in the average rates of return on different real and financial international claims and liabilities, discussed above and shown in table 9, suggest that any shift away from direct investment inflows as a counterpart to the current account deficit is likely to imply higher net investment income payments.
The company's objective to fine tune its operations, fill in gaps in its existing product lines and to strengthen those which are already producing above average rates of return.
And two key long-term measures for the success of pension system investments - the 10- and 20-year average rates of return - came in at composite averages of 8.