17 Questions
What does a shorter discounted payback period indicate about an investment?
A shorter discounted payback period indicates that the investment may be considered less risky, as the investor will recover their initial investment sooner.
What is a limitation of the Accounting Rate of Return (ARR) method?
The Accounting Rate of Return (ARR) method does not consider the time value of money or cash flow.
How do investments with different Accounting Rates of Return (ARR) typically get ranked?
Investments with different Accounting Rates of Return (ARR) are typically ranked in order of the rate of earnings or accounting rate of returns.
What is the main difference between the discounted payback period and the regular payback period?
The discounted payback period considers the time value of money, while the regular payback period does not.
What is the formula to calculate the Discounted Payback Period?
Discounted Payback Period = Unrecovered Amount / Years Until Break-Even + 12 Cash Flow in Recovery Year
Why is the Accounting Rate of Return (ARR) method also known as the 'accounting rate of return method'?
The Accounting Rate of Return (ARR) method is also known as the 'accounting rate of return method' because it uses the accounting concept of profit rather than cash inflows.
What is the primary criterion for evaluating the cash payback period of a project, and what does a lower payback period indicate about the project's investment?
The primary criterion for evaluating the cash payback period is the company's criteria. A lower payback period indicates that the project recovers its investment quickly, suggesting a higher likelihood of profitability.
How does the Accounting Rate of Return (ARR) method calculate the profitability of an investment proposal, and what is the significance of a higher ARR?
The ARR method calculates the profitability of an investment proposal by dividing the average profit after tax (PAT) by the initial investment. A higher ARR indicates a higher cash inflow in the future, making the investment more attractive.
What is the implication of a project having a lower expected rate of return than the minimum rate, as seen in the year 2020, and what could be the management's decision based on this result?
A lower expected rate of return than the minimum rate implies that the investment may not be profitable, and management may decide to reduce or re-evaluate the investment in the project.
What is the significance of the payback period analysis in evaluating investment projects, and how does it relate to the concept of discounted cash flow?
The payback period analysis is significant in evaluating investment projects as it provides an estimate of the time it takes to recover the initial investment. This is related to the concept of discounted cash flow, which considers the time value of money and the present value of future cash flows.
How does the internal rate of return (IRR) differ from the accounting rate of return (ARR), and which method is more comprehensive in evaluating investment projects?
The IRR is a more comprehensive method that considers the time value of money and the present value of future cash flows, whereas the ARR is a simpler method that uses accounting information. The IRR is a more accurate method for evaluating investment projects.
What is the relationship between the net present value (NPV) and the internal rate of return (IRR), and how can they be used together to evaluate investment projects?
The NPV and IRR are related concepts, as the IRR is the rate at which the NPV becomes zero. Together, they can be used to evaluate investment projects by assessing the project's profitability and viability.
What is the primary distinction between the accounting rate of return (ARR) and discounted cash flow (DCF) techniques?
ARR ignores time value of money, while DCF considers it.
In the net present value method, what is the purpose of the required rate of return?
It is used as the discount rate in the calculation.
How does the payback period differ from the net present value method?
Payback period ignores time value of money and only considers the time it takes to recover the initial investment.
What is the internal rate of return (IRR) of a project, and how is it related to the net present value?
IRR is the discount rate at which the net present value equals zero; it is the rate at which the project breaks even.
Why is it essential to consider the time value of money when evaluating projects with different costs and service lives?
Because it allows for a more accurate comparison of projects with different cash flows and timing.
Understand the concept of discounted payback period and how it affects the risk of an investment. Learn how to calculate it and make informed decisions. This quiz is perfect for finance students and professionals looking to improve their knowledge of investment analysis.
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