Managerial economics

• Accounting Rate of Return (ARR) Properties:
• Statement (I) is true: In capital budgeting, the Average Rate of Return is conceptually the reciprocal of the Payback Period when cash flows are constant and unadjusted:

$$\text{ARR} = \frac{\text{Average Annual Profit}}{\text{Initial or Average Investment}} \approx \frac{1}{\text{Payback Period}}$$

• Statement (II) is true: A primary limitation of the ARR method is that it is a non-discounted capital budgeting technique; it calculates returns based on accounting book profits rather than discounted cash flows, completely ignoring the time value of money.
• Conclusion: Both Statement (I) and Statement (II) are true, corresponding to Option 1.

Correct option: (1) Both Statement (I) and Statement (II) are true.

• Network and Scheduling Methods:
• Critical Path Method (CPM) $\rightarrow$ (I) Optimal use of available limited resources: A deterministic project management tool focusing on identifying the critical sequence of activities and optimizing time-cost trade-offs and resource crashing.
• Programme Evaluation and Review Technique (PERT) $\rightarrow$ (II) Scheduling technique: A probabilistic project scheduling tool utilizing three-time estimates for non-repetitive R&D projects.
• Graphical Evaluation and Review Technique (GERT) $\rightarrow$ (IV) Probabilistic events: A sophisticated network modeling technique that accommodates probabilistic activity branching, looping, and stochastic node outcomes.
• Line of Balance (LOB) $\rightarrow$ (III) Progress achievement of the project: A specialized graphical scheduling technique used in repetitive manufacturing and multi-unit construction projects to monitor assembly progress against planned delivery schedules.
• Correct Match: (A)-(I), (B)-(II), (C)-(IV), (D)-(III), corresponding to Option 3.

Correct option: (3) (A) - (1), (B) - (I), (C) - (V), (D) - (ttl)

• Economic Function of Commodity Futures Trading:
• Price Risk Hedging: Agricultural prices are notoriously volatile due to unpredictable weather, supply gluts, and geopolitical demand shifts. The primary economic function and benefit of futures contracts for farmers, producer organizations (FPOs), and agribusinesses is hedging against unpredictable price volatility.
• By entering into a futures contract, producers lock in a forward sales price months prior to harvest, guaranteeing a predetermined revenue stream and immunizing their farm business against downward price shocks at harvest time.
• Distractors: Futures markets do not eliminate natural market shifts; rather, they transfer price risk from risk-averse producers (hedgers) to risk-seeking investors (speculators).

Correct option: (4) to cover price risk against the unpredictable changes in prices