Question

You are considering a project with conventional cash flows and the following characteristics:

Discounted Payback	2.95 Years
NPV	$510,000
IRR	12%

Which of the following statements is correct given this information?

I.	The discount rate used in computing the net present value was greater than 12%.
II.	The payback period must be greater than 2.95 years.
III.	This project should be accepted as the NPV is positive.

Answer 1

Option I :- Discount rate used for determination of net present value is Cost of capital or required rate of return but not the Internal rate of return (IRR). Hence the option I is incorrect.

Option II :- Payback period is computed using the conventional cashflows that are original cashflows rather than the discounted cashflows. Hence the conventional cashflows will be more than discounted cashflows used for computation of Payback period. Hence Conventional payback period will be less than the discounted payback period. So Option II is incorrect.

Option III :- When Net Present value (NPV) is used as a creteria for decision making purpose, So Projects with whoose net present value is positive is to be accepted.

Hence answer is Option III.