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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?
- ror=interest rate/Capital invested
- ror=(Total cost)(Capital invested)
- ror=Net annual profit/Capital invested (correct)
- ror=(Net annual profit)(Total revenue)
What does the rate of return (ROR) method measure?
What does the rate of return (ROR) method measure?
- Effectiveness of an investment of capital (correct)
- Interest on the original investment
- Cost of financing the project
- Total revenue generated
What is included as a cost in the Annual Worth (AW) method?
What is included as a cost in the Annual Worth (AW) method?
- Total cost
- Total revenue
- Minimum required profit
- Interest on the original investment (correct)
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?
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?
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?
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?
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?
What does the Rate of Return on Additional Investment Method measure?
What does the Rate of Return on Additional Investment Method measure?
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?
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?
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?
What is included as a cost in the Annual Worth (AW) method?
What is included as a cost in the Annual Worth (AW) method?
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?
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?
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?
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?
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?
What does the rate of return (ROR) method measure?
What does the rate of return (ROR) method measure?
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?
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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
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