ERR - Economic Rate of Return

Question

BlackTom AI · Accepted Answer

Topic at hand: ERR stands for Economic Rate of Return, used to assess project viability from an economic perspective. 
Option 1: 'measures the financial return of an investment' – This describes financial rate of return (like ROI or IRR) focusing on monetary gains to investors, not the broader economic impact. It does not capture the economic/cost comparison focus of ERR. 
Option 2: 'measures how a project's cash flows compare to its costs' – This statement emphasizes evaluating cash inflows against costs, which is aligned with the economic appraisal logic of ERR, considering whether the project delivers value over its expenditures within an economic framework. 
Option 3: 'should be higher than financial return in order to have development impact' – This mixes concepts: ERR is not about being higher than a financial return, and development impact depends on distribution, opportunity costs, and broader effects; this oversimplifies the relationship and is not a defining property of ERR. 
Option 4: 'measures contribution to GDP growth' – ERR is about the relation of cash flows to costs within a project, not a direct measure of GDP contribution, which is a macro-level outcome and not the core definition of ERR. 
Summary across options: The second option uniquely captures the core ECONOMIC comparison ERR performs—how the project’s cash inflows relate to its costs, within an economic appraisal framework. The other choices describe concepts more aligned with financial return, broad development impact assumptions, or macroeconomic GDP focus, which are not the essence of ERR.

BU.232.725.81.SP25 M6 Comprehension Check (82)

ERR - Economic Rate of Return

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