alleryStart learning →What does the ARR method do about risk in long-term forecasts?
AAdds a risk premium
BDoes not adjust for it
CUses a beta factor
DHalves the return
Answer & Solution
Correct answer: B. Does not adjust for it
ARR takes the forecast profits as given and makes no adjustment for the uncertainty of distant years.
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Related questions
Which measures do economists prefer over payback for return?Rs 9,00,000 is invested and net cash flow is Rs 1,80,000 a year. Payback?A: profit Rs 40,000 on average investment Rs 2,00,000. B: Rs 54,000 on Rs 3,60,000. HigherCost Rs 12,00,000 and scrap Rs 2,00,000. Average investment under ARR?Cost Rs 3,00,000, scrap Rs 60,000, 4 years, total profit Rs 1,44,000. ARR?Which goal underlies capital budgeting in corporate finance?Capital budgeting mainly concerns which type of spending?Companies create value when their return on capital is above what?