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True or False (T/F) 2. The payback calculation divides the initial cost of the investment by...

True or False (T/F)

2. The payback calculation divides the initial cost of the investment by incremental annual cash flow.

3. The higher the risk, the more lenders and investors want to be compensated for their capital, and the lower the cost of capital.

4. An advantage of the IRR method is that it allows managers to compare deals with different sales prices and costs.

5. NPV and IRR calculations most of the time provide the same accept or reject decisions.

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Answer #1

2. The payback calculation divides the initial cost of the investment by incremental annual cash flow.

TRUE

Payback period = Initial Investment/Annual cash flow

3. The higher the risk, the more lenders and investors want to be compensated for their capital, and the lower the cost of capital.

FALSE, the higher the risk, the higher the compensation and higher the cost of capital

4. An advantage of the IRR method is that it allows managers to compare deals with different sales prices and costs.

TRUE, IRR is the rate of return provided by the project

Hence, it helps compare projects

5. NPV and IRR calculations most of the time provide the same accept or reject decisions.

TRUE

IRR is the rate at which NPV = 0 and NPV = Present value of cash inflows – present value of cash outflows

These methods most of the times provide same decision

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