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# Average gross rate of return

The average gross annual rate of return method is entirely concerned with profitability; the payback period is completely ignored. This method calculates the average proceeds, that is, positive net cash flow, per year over the life of the project and expresses this average as a percentage return per year on the project investment. This can be explained by looking again at my example project A.

The variables in the equations stand for the following:

• PI is initial project investment
• NCF is positive net cash flow
• L is project life.

Where PI = £100 000, NCF = £135 000, and L = 5 years:

Expressed as a percentage return on the initial investment, this is 27% per year or

## Activity 5 Average gross annual rate

Timing: Allow 15 minutes to complete this activity

Calculate the average gross annual rate of return on project B.