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 ?
15) We also estimate Equations (5) and (6), where the dependent variables are the average rate of return in the IT and non-IT industries.
Mean value for Weighted Average Rate of Return on Deposit is 10.
12 percent) but most of the firms have positive average rate of return.
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Tools of Data Analysis: For analysis of share price data; rate of return, average return and average rate of return have been computed with the help of following steps.
It was further explained that the average rate of return is almost 30% and in some cases up to 50%.
The average rate of return on a buy-to-let investment over the past five years is 10.
Dubai Capital has posted an annual average rate of return of 58 percent from its inception in 2003 to the end of 2007, with double digit returns each year including in 2006, when the regional index for the Middle East and North Africa was down 37 percent.
Say you were choosing between several mutual funds, each of which had an average rate of return of 10%, but which had a range of standard deviations between, e.
The average rate of return seems to be a lot better than you could get at the bank," he said, or in the stock market.
And if that investment yields an annual average rate of return of 12 percent, we're talking $429,263 in 15 years.

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