Discount Rate vs Payback Period Quiz

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What is the primary purpose of an economic evaluation?

To determine the financial desirability of a project or investment (correct)

To compare the performance of different economic sectors

To assess the social and environmental impact of economic activities

To analyze the market trends and predict future economic conditions

What is the difference between interest rate and discount rate?

Interest rate and discount rate are the same, and they both represent the cost of borrowing money

Interest rate is the price paid for the use of money, while discount rate is the rate at which the value of money decreases over time

Interest rate is the rate at which money grows, while discount rate is the rate at which money is borrowed

Interest rate is the rate of gain received from an investment, while discount rate is the rate at which future amounts are reduced to their present value (correct)

What does an 11% interest rate indicate?

For every dollar of money used, an additional $0.11 must be returned as payment for the use of that money (correct)

For every dollar of money used, an additional $11 must be returned as payment for the use of that money

For every dollar of money used, the borrower must pay $0.11 in interest charges

For every dollar of money used, the lender will receive $0.11 in interest income

Who determines the interest rate?

The market through mutual agreement between the borrower and the lender Signup and view all the answers

What is the main purpose of the discount rate?

To determine the present value of future cash flows Signup and view all the answers

How is the interest rate different from the discount rate?

Interest rate is the price of borrowing money, while discount rate is the rate used to determine the present value of future cash flows Signup and view all the answers

What is the main difference between discount rate and interest rate?

The discount rate represents real change in value based on productive use of money and inflation, while the interest rate does not. Signup and view all the answers

What does the payback period represent in a firm's investment?

The exact length of time needed to recover the initial investment from cash inflows. Signup and view all the answers

In the context of the time value of money, why is a dollar received in the future worth less than a dollar received today?

Because money can earn interest through investment over time. Signup and view all the answers

What concept arises due to the relationship between interest and time in finance?

Time value of money Signup and view all the answers

How does the time value of money affect investments over different periods?

It shows that a dollar today can earn interest for tomorrow, increasing its future value. Signup and view all the answers

Given an option between two investments, how does the cost of capital affect decision-making?

It influences the selection based on which investment generates higher returns at a lower cost. Signup and view all the answers

What is the primary difference between NPV and IRR in terms of reinvestment assumptions?

NPV assumes reinvestment at the cost of capital, while IRR assumes reinvestment at the project's IRR. Signup and view all the answers

If the NPV of a project is negative, what should a company do?

Reject the project, as a negative NPV indicates an unprofitable investment. Signup and view all the answers

What is the relationship between NPV and IRR when NPV = 0?

The IRR is equal to the discount rate where NPV = 0. Signup and view all the answers

Why do companies prefer larger cash inflows in the early years of a project?

Early cash inflows have a lower cost of capital and are more predictable. Signup and view all the answers

Which statement best describes the relationship between NPV and payback period?

Companies shy away from long-term payback periods due to the relative uncertainties of later cash inflows. Signup and view all the answers

Which of the following statements about NPV and IRR is true?

NPV is a more conservative approach than IRR. Signup and view all the answers

Discount Rate vs Payback Period Quiz

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