The economic rate of return on an asset is defined as A)[(C₁ + PV₁ - PV₀)]/(PV₀). B)[(C₁ - (PV₁ - PV₀)]/(PV₀). C)[(C₁ + PV₁)]/(PV₀). D)[(C₁ + PV₀)]/(PV₁).

Question

Quizplus · Accepted Answer

The economic rate of return on an asset is calculated as the present value of cash flows (income and appreciation) from the asset over a period of time, minus the initial investment, divided by the initial investment. The formula in option A is the correct representation of this calculation, where CS1 represents the cash flow in year one, U1 represents the discount rate in year one, B11 represents the end of year one, S1 represents the sale price of the asset, and B0 represents the beginning of the investment period. Option B is incorrect because it subtracts the present value of the appreciation from the cash flow, which is not necessary in the calculation. Option C is incorrect because it does not subtract the initial investment from the numerator. Option D is incorrect because it divides the sum of the cash flow and the initial investment by the present value of the sale price, which does not accurately represent the formula for economic rate of return.

The Economic Rate of Return on an Asset Is Defined