Podcast
Questions and Answers
What is the formula for the rate of return on the capital invested?
What is the formula for the rate of return on the capital invested?
What does the rate of return (ROR) method measure?
What does the rate of return (ROR) method measure?
What is included as a cost in the Annual Worth (AW) method?
What is included as a cost in the Annual Worth (AW) method?
Under what conditions is the proposed investment justified in the Annual Worth (AW) method?
Under what conditions is the proposed investment justified in the Annual Worth (AW) method?
Signup and view all the answers
What kind of revenue and cost data is assumed in the Rate of Return (ROR) method?
What kind of revenue and cost data is assumed in the Rate of Return (ROR) method?
Signup and view all the answers
Which method is based on the concept of present worth and is used extensively in making economy studies in the public works field?
Which method is based on the concept of present worth and is used extensively in making economy studies in the public works field?
Signup and view all the answers
According to the fundamental principle on comparing alternatives, which alternative will always be used unless there are definite reasons to adopt an alternative requiring a larger investment?
According to the fundamental principle on comparing alternatives, which alternative will always be used unless there are definite reasons to adopt an alternative requiring a larger investment?
Signup and view all the answers
Which method is defined as the length of time required to recover the first cost of an investment from the net cash flow produced by that investment for an interest rate of zero?
Which method is defined as the length of time required to recover the first cost of an investment from the net cash flow produced by that investment for an interest rate of zero?
Signup and view all the answers
What does the Rate of Return on Additional Investment Method measure?
What does the Rate of Return on Additional Investment Method measure?
Signup and view all the answers
Which method applies only to alternatives with uniform cost data for each year and a single investment capital at the beginning of the first year of the project life?
Which method applies only to alternatives with uniform cost data for each year and a single investment capital at the beginning of the first year of the project life?
Signup and view all the answers
What is the primary purpose of the rate of return (ROR) method in economy studies?
What is the primary purpose of the rate of return (ROR) method in economy studies?
Signup and view all the answers
What are the conditions for using the rate of return (ROR) method in economy studies?
What are the conditions for using the rate of return (ROR) method in economy studies?
Signup and view all the answers
What is included as a cost in the Annual Worth (AW) method?
What is included as a cost in the Annual Worth (AW) method?
Signup and view all the answers
What does the Annual Worth (AW) method declare as justification for a proposed investment?
What does the Annual Worth (AW) method declare as justification for a proposed investment?
Signup and view all the answers
Which method applies to alternatives with uniform cost data for each year and a single investment of capital at the beginning of the first year of the project life?
Which method applies to alternatives with uniform cost data for each year and a single investment of capital at the beginning of the first year of the project life?
Signup and view all the answers
What is the primary economic justification criterion for the present worth (PW) method?
What is the primary economic justification criterion for the present worth (PW) method?
Signup and view all the answers
How is the future worth (FW) method different from the present worth (PW) method?
How is the future worth (FW) method different from the present worth (PW) method?
Signup and view all the answers
Which method measures the length of time required to recover the first cost of an investment from the net cash flow produced by that investment?
Which method measures the length of time required to recover the first cost of an investment from the net cash flow produced by that investment?
Signup and view all the answers
What does the rate of return (ROR) method measure?
What does the rate of return (ROR) method measure?
Signup and view all the answers
Under what conditions is the proposed investment justified in the Annual Worth (AW) method?
Under what conditions is the proposed investment justified in the Annual Worth (AW) method?
Signup and view all the answers
Study Notes
Economy Studies Methods
- Formula for rate of return on capital invested: not specified
- Rate of Return (ROR) method measures the rate of earnings on invested capital
- Annual Worth (AW) method includes costs such as operating and maintenance costs
Annual Worth (AW) Method
- Proposed investment is justified if AW ≥ 0
- Includes costs such as operating and maintenance costs
Rate of Return (ROR) Method
- Assumes revenue and cost data in terms of net cash flow
- Primary purpose is to evaluate the profitability of an investment
- Conditions for use: data on net cash flow available, single investment, and uniform cash flow
- Measures the rate of earnings on invested capital
- Rate of Return on Additional Investment Method measures the rate of return on additional investment
Present Worth (PW) Method
- Primary economic justification criterion: PW ≥ 0
- Based on the concept of present worth and used extensively in public works field
- Different from Future Worth (FW) method, which considers the future value of money
Payback Period Method
- Measures the length of time required to recover the first cost of an investment from the net cash flow produced
- Defined as the length of time required to recover the first cost of an investment from the net cash flow produced for an interest rate of zero
Comparing Alternatives
- Alternative with smaller investment will always be used unless there are definite reasons to adopt an alternative requiring a larger investment
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Explore the basic methods and formulas for making economy studies, focusing on the Rate of Return (ROR) method. Understand how to calculate the rate of return on the capital invested and its significance as a measure of investment effectiveness.
