Question

Which of these is the key disadvantage of using payback period and accounting rate of return as ways to evaluate a financial project?

a.They are hard to calculate b.They ignore timing of cash flows and the time value of money c.

There is no built-in Excel formula for calculating them At the heart of discounted cash flow techniques lies what principle? a.Markets are efficient b.Balance sheets must balance in the end c.Money has a time value that depends on when it is received

Which of these is the best description of internal rate of return (IRR) of an investment opportunity? a.The overall rate of return of the company considering the investment b.Discount rate at which the net present value is equal to zero c.An obscure financial measure that is rarely used by company management

Answer 1

Question-1 "Which of these is the key disadvantage of using payback period and accounting rate of return as ways to evaluate a financial project?"

Answer: Option "B" i.e "They ignore the timing of cash flows and the time value of money"

Explanation: Because they do not bring the future cash flow in the present value by multiplying it with the discounting factors the true Net Present Value of Benefits can not be driven and the Payback Period is Calculated is not relevant, although we can use Discounted Payback Period that takes into account the time value of money.

Question-2 "At the heart of discounted cash flow techniques lies what principle? "

Answer: Option "C" i.e "Money has a time value that depends on when it is received"

Explanation: The money received after one year and two years can't be same until it is discounted by the Present Value Factor that is as per the Year in which the cash flow is received, so Money has time value that depends on when it is received.

Question-3 "Which of these is the best description of internal rate of return (IRR) of an investment opportunity?"

Answer: Option "B" i.e "Discount rate at which the net present value is equal to zero"

Explanation: At IRR the Net Present Value of Cash inflow is Equal to the Net Present Value of Cash Outflow, We can say NPV = 0, this is the Minimum return a company require to break-even and suffer no loss.