Cost-Benefit Analysis: Payback & Accounting Rate of Return


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Which is more accurate when analyzing the return of an investment?

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1. If an asset costs $100,000 and generates $50,000 per year, how long is the payback period?

2. If an asset costs $40,000 and over 5 years generates $20,000 in profits, what is the ARR?

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About This Quiz & Worksheet

Learn more about the payback method and accounting rate of return, and how both of these analytical tools are used to measure the viability of an investment. To be successful on this quiz, you will need a good understanding of these principles of business finance and basic math.

Quiz & Worksheet Goals

To demonstrate your knowledge of this subject, you will be quizzed on:

  • Determining the payback period of hypothetical assets
  • Determining the accounting rate of return of hypothetical assets
  • How to interpret these metrics to determine the viability of an investment

Skills Practiced

  • Problem solving - use the acquired knowledge to determine the payback period and rate of return for various hypothetical assets
  • Distinguishing differences - compare and contrast the two described analytical methods
  • Interpreting information - verify that you can read information regarding cost-benefit analysis to make well-informed assessments of various investments

Additional Learning

To learn more about this particular topic, be sure to review the accompanying lesson named Cost-Benefit Analysis: Payback & Accounting Rate of Return. The lesson covers:

  • What information is needed to calculate the payback period of an asset
  • What information is need to calculate the rate of return
  • What can be inferred about an asset based on this analysis