Question

Between The company's return on investment for last year. and The Board of Directors of Redstone...

Between The company's return on investment for last year.

and The Board of Directors of Redstone has set a minimum required return of 25%.

Which of these two measures do you prefer, Explain?

Business   Accounting   
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Answer #1

Minimum required rate of return is a better measure for evaluating investment proposal because it is the minimum acceptable level of comoensation that an investor desires for the level of risks that are undertaken by him. It is widely used concept and is used as discounting factor to caculate present value if future cash flows expected to arise out of investments. It is future oriented whereas the company's rate of return for last year is not relevant to determine the returm in subsequent years because there is a lot of uncertainity in the economic world.

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