1. What is the Economic Rate of Return (ERR)?

The Economic Rate of Return (ERR) is a financial metric used to evaluate the profitability of an investment or project. It represents the discount rate at which the present value of future benefits equals the present value of costs.

2. How Does the Calculator Work?

The calculator uses the ERR equation:

Where:

• \( FV\ Benefits \) — Future value of benefits (currency)
• \( PV\ Costs \) — Present value of costs (currency)
• \( n \) — Time period in years

Explanation: The equation calculates the annualized rate of return that equates the present value of costs with the future value of benefits.

3. Importance of ERR Calculation

Details: ERR is crucial for investment decision-making, project evaluation, and comparing different investment opportunities. It helps determine whether a project is economically viable.

4. Using the Calculator

Tips: Enter future benefits and present costs in the same currency, and the time period in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between ERR and IRR?
A: ERR uses economic prices (shadow prices) while IRR uses market prices. ERR is often used for public projects, IRR for private investments.

Q2: What is a good ERR value?
A: Generally, an ERR higher than the social discount rate (often 8-12% for developing countries) is considered acceptable for public projects.

Q3: How does time period affect ERR?
A: Longer time periods typically result in lower ERR values for the same benefit-cost ratio, as returns are spread over more years.

Q4: Can ERR be negative?
A: Yes, if costs exceed benefits, ERR will be negative, indicating a loss-making project.

Q5: What are the limitations of ERR?
A: ERR doesn't account for project scale and may favor small projects with high returns over larger, more impactful projects.