Question

Your firm is considering a project that has an NPV of $32,600, an IRR of 9.5 percent, and a payback period of 8.9 years. The required return is 9% and the required payback period is 9 years. Which one of the following statements correctly applies to this project?

A) The net present value indicates accept while the internal rate of return indicates reject.

B) The payback decision rule is sufficient in making the decision about the project.

C) The payback decision rule is against the accept decision indicated by the net present value.

D) The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision.

E) The net present value decision rule is the only rule that matters when making the final decision.

Answer 1

Correct Answer is option B
We have to acccept the project if

• NPV is positive
• IRR> required rate of return
• Payback period < required payback period

In this case-

• NPV = 32600 positive
• IRR - 9.5% > 9% required rate
• Payvack period - 8.9 years< 9 years required payback period

All other options are incorrect because NPV and IRR both accept the project - Option A is incorrect
Payback decision in the favour not againts, if the payback period is given we have to consider the payback period we can't ignore the payback period.
NPV is not only the rule to accept the Project, if IRR< required return project is not acccepted.

I hope this clear your doubt.

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