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Questions and Answers
What does the payback period represent?
What does the payback period represent?
- The time it takes for a project to become profitable
- The total profit generated by a project
- The estimated future cash flows from a project
- The length of time required to recover the initial investment (correct)
Which of the following is considered under the Net Present Value (NPV) calculation?
Which of the following is considered under the Net Present Value (NPV) calculation?
- The expected demand for the product
- The physical location of the project
- Market risk assessment
- Estimation of all net cash flows (correct)
What is the decision rule for accepting a project based on NPV?
What is the decision rule for accepting a project based on NPV?
- Accept if NPV > 0 (correct)
- Accept if NPV < 0
- Accept if NPV = 0
- Accept if NPV is less than the cost of capital
Which strategy aligns with the payback rule?
Which strategy aligns with the payback rule?
When calculating NPV, which factor does NOT need to be considered?
When calculating NPV, which factor does NOT need to be considered?
Flashcards
Payback Period
Payback Period
The number of years it takes for a project's accumulated cash inflows to equal the initial investment cost.
Payback Rule
Payback Rule
A rule that suggests selecting projects with a payback period within a desired timeframe, or alternatively, choosing the project with the shortest payback period.
Net Present Value (NPV)
Net Present Value (NPV)
The present value of all future cash flows from a project, minus the initial investment cost.
NPV Rules
NPV Rules
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Study Notes
Payback Period
- The payback period is the number of years it takes for cumulative forecasted cash flows to equal the initial investment.
Payback Rule
- Select projects with a payback period within the desired timeframe.
- Prioritize projects with the shortest payback period.
Net Present Value (NPV)
- Calculate all net cash flows (positive and negative).
- Determine the project's cost of capital.
- Calculate the present value of the cash flows.
NPV Rules
- Accept projects with a positive NPV.
- Reject projects with a negative NPV.
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