ACtE09 · Chapter 9Programming & Applications🏛️ Past Licensure QuestionID: 8dab270d
In engineering economics and project financial appraisal, which evaluation method is NOT recommended for major capital investment decisions because it completely ignores the time value of money?
In engineering economics and project financial appraisal, which evaluation method is NOT recommended for major capital investment decisions because it completely ignores the time value of money?
Multiple Choice Options
- A✓ Correct Option
Accounting Rate of Return (ARR) / Payback Period without discounting
- B
Annual Worth (AW)
- C
External Rate of Return (ERR)
- D
Net Present Value (NPV)
Detailed Technical Solution & Explanation
The Accounting Rate of Return (ARR) (and simple Payback Period) evaluates projects based on non-discounted accounting profits and book values, completely ignoring the time value of money, making it unreliable for major capital budgeting decisions.
Option Analysis:
•
Option A (Accounting Rate of Return): Correct; ignores time value of money.
•
Option B (Annual Worth): Discounted cash flow method (accounts for time value).
•
Option C (External Rate of Return): Discounted cash flow method.
•
Option D (Net Present Value): Gold standard discounted cash flow method.
Reference: Demo2 · Set 1NEC Licensure Syllabus