Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
What are the advantages of the average accounting rate of return method?

I. It is easy to understand and simple to use.
II. It considers cash flows, not economic income.
III. It considers the time value of money.
IV. Any sunk costs are excluded from the rate calculation.

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
What are the advantages of the average accounting rate of return method?

I. It is easy to understand and simple to use.
II. It considers cash flows, not economic income.
III. It considers the time value of money.
IV. Any sunk costs are excluded from the rate calculation.
?

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
What are the advantages of the average accounting rate of return method?

I. It is easy to understand and simple to use.
II. It considers cash flows, not economic income.
III. It considers the time value of money.
IV. Any sunk costs are excluded from the rate calculation.
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#### Parent (intermediate) annotation

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dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

#### Original toplevel document

Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.

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