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Learning objective

Explain investment projects such as investment in machinery, buildings and vehicles.

Read the explanation, check the common trap, then practise with flashcards and questions.

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Topic

Financial terms and calculations

Subtopic

Average rate of return

Aqa Gcse BusinessFinance

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Quick explanation

Explain investment projects such as investment in machinery, buildings and vehicles

  • This point belongs to Financial terms and calculations, especially Average rate of return.
  • You need to be able to explain investment projects such as investment in machinery, buildings and vehicles.
  • The key ideas to know are buildings, vehicles, and machinery.
  • Use the linked flashcards and practice questions to check recall, then practise applying the idea in an exam-style answer.

Key concepts

buildingsvehiclesmachineryinvestment

Why it matters

This objective helps connect Average rate of return to exam-style questions, flashcards, and revision notes for Financial terms and calculations.

Quick student answer

A small manufacturer buys a new machine for £20,000. Over the next 5 years it generates net cash inflows of £5,000 each year. Calculate the average rate of return and state whether the investment is acceptable if the company requires a minimum return of 15%.

Direct answer

The average rate of return is 125%. The investment is acceptable because 125% exceeds the required 15%.

How it works

Total net cash inflow = £5,000 × 5 = £25,000. Divide by initial investment £20,000 gives 1.25. Multiply by 100 to get 125%. Since 125% > 15%, the investment meets the company’s target.

Key terms

  • Average Rate of Return: The percentage of the initial investment that is recovered as net cash inflow over the life of the investment.

Common trap

Confusing average rate of return with profit margin: Average rate of return uses the initial investment as the denominator, not revenue; profit margin uses revenue.

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