HPE0-P26 · Question #70
Is this statement correct? Solution: ROI is a calculation that uses the discount rate to account for the time value of money.
The correct answer is B. No. B is correct because ROI (Return on Investment) is a simple ratio - (Net Gain / Cost of Investment) × 100 - that does not incorporate a discount rate or account for the time value of money. It treats all cash flows as equally valuable regardless of when they occur. Why A is…
Question
Is this statement correct? Solution: ROI is a calculation that uses the discount rate to account for the time value of money.
Options
- AYes
- BNo
How the community answered
(41 responses)- A12% (5)
- B88% (36)
Explanation
B is correct because ROI (Return on Investment) is a simple ratio - (Net Gain / Cost of Investment) × 100 - that does not incorporate a discount rate or account for the time value of money. It treats all cash flows as equally valuable regardless of when they occur.
Why A is wrong: The description in the statement actually defines a discounted cash flow method, such as NPV (Net Present Value) or IRR (Internal Rate of Return), not ROI. Confusing these is a common trap on exams.
Memory tip: Think of ROI as "raw" - it's a quick, unsophisticated snapshot of profitability. Anything involving a discount rate belongs to the DCF family (NPV, IRR). If you see "time value of money" + "discount rate," the answer is never plain ROI.
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