Question

1. What is the difference between payback period and discounted payback period? Do you know any...

1. What is the difference between payback period and discounted payback period? Do you know any projects that used these two capital budgeting techniques?

2. What are the reinvestment rate assumptions for NPV and IRR?

3. The U.S. economy is contracting this year. What can corporate capital spending signal to this issue?

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Answer #1

Payback period : It is the time needed to return the amount which is equal to first investment. It does not account for inflation or time value of money.

Discounted Payback period : It is the time needed to return the amount which is equal to first investment as well as value it gains in the given time period. It accounts for inflation or time value of money.

Reinvestment rate assumptions for NPV :

There is no reinvestment rate assumption for NPV. Therefore, it will not affect final result of given project.

Reinvestment rate assumptions for IRR :

The assumption is that the company will reinvest amount at the same IRR till the end of the project. Therefore the IRR of the project is feasible only if reinvestment rate is higher than IRR's rate of return.

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