Which of the following were listed as potential Problems or Issues associated with Using a Rate of Return Approach to justifying single or multiple Mutually Exclusive projects? Note: This is a Multiple Answer question. Please select all the following options you think are correct? O The ROR calculations are typically more complex than the PW, AW, or FW methods and frequently require the use of trial and error techniques. O You cannot rely on the best Mutually Exclusive project to have the highest ROR. O An incremental approach is required to reliably determine the best project when comparing multiple Mutually Exclusive projects with the ROR approach. OThis method assumes that any net positive cash flows are reinvested at the ROR rate. If the ROR rate is substantially larger than MARR. this might not be a realistic assumption. For any sequence of Net Cash Flows with more than one sign chance over the life of the project there may be more than one ROR value that satisfies the Rate of Return definition.
Which of the following were listed as potential Problems or Issues associated with Using a Rate of Return Approach to justifying single or multiple Mutually Exclusive projects? Note: This is a Multiple Answer question. Please select all the following options you think are correct? O The ROR calculations are typically more complex than the PW, AW, or FW methods and frequently require the use of trial and error techniques. O You cannot rely on the best Mutually Exclusive project to have the highest ROR. O An incremental approach is required to reliably determine the best project when comparing multiple Mutually Exclusive projects with the ROR approach. OThis method assumes that any net positive cash flows are reinvested at the ROR rate. If the ROR rate is substantially larger than MARR. this might not be a realistic assumption. For any sequence of Net Cash Flows with more than one sign chance over the life of the project there may be more than one ROR value that satisfies the Rate of Return definition.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Title: Issues with Using the Rate of Return Approach for Evaluating Projects**
**Introduction:**
Understanding the challenges of using the Rate of Return (ROR) approach in evaluating single or multiple mutually exclusive projects is crucial. Below are several potential problems or issues to consider:
**Multiple Choice Question:**
Which of the following were listed as potential problems or issues associated with using a Rate of Return approach to justify single or multiple mutually exclusive projects?
**Note:** This is a multiple-answer question. Please select all of the following options you think are correct.
**Options:**
1. **Complex Calculations:**
- The ROR calculations are typically more complex than the Present Worth (PW), Annual Worth (AW), or Future Worth (FW) methods and frequently require the use of trial and error techniques.
2. **Reliability of Highest ROR:**
- You cannot rely on the best mutually exclusive project to have the highest ROR.
3. **Incremental Approach:**
- An incremental approach is required to reliably determine the best project when comparing multiple mutually exclusive projects with the ROR approach.
4. **Reinvestment Assumptions:**
- This method assumes that any net positive cash flows are reinvested at the ROR rate. If the ROR rate is substantially larger than the Minimum Attractive Rate of Return (MARR), this might not be a realistic assumption.
5. **Multiple ROR Values:**
- For any sequence of net cash flows with more than one sign change over the life of the project, there may be more than one ROR value that satisfies the Rate of Return definition.
**Conclusion:**
These issues highlight the complexity and assumptions involved in using the ROR approach and the importance of considering multiple factors in project evaluation.
Expert Solution
Answer-
Correct issues of ROR Approach- (2, 3, and 5)
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