What are the benefits of Economic analysis? What are the disadvantages of the Accounting rate of return method?

(b) Using the Internal rate of return method, determine the rate of return of the given project if the capital cost is Rs. 250000.

Net Savings & Project Z

First Year - 80000

Second Year - 95000

Third Year - 115000

Fourth Year - 90000

Fifth Year - 65000

Economic analysis helps businesses make informed decisions and evaluate project costs and benefits. The accounting rate of return method has limitations. The internal rate of return of the project is calculated based on net savings over five years with a capital cost of Rs. 250,000.

Explanation:

The benefits of economic analysis include helping businesses make informed decisions, evaluating the costs and benefits of projects, and understanding market trends and competition. However, accounting rate of return has limitations such as not considering the time value of money and relying on accounting profits rather than cash flows. Using the internal rate of return method, the rate of return for the given project with a capital cost of Rs. 250,000 can be calculated as follows:

Net savings in the first year: Rs. 80,000
Net savings in the second year: Rs. 95,000
Net savings in the third year: Rs. 115,000
Net savings in the fourth year: Rs. 90,000
Net savings in the fifth year: Rs. 65,000

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