COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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increase the project’s profitability index.
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increase the project’s payback period.
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decrease the project’s net present value.
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increase the project’s internal rate of return.
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Detailed explanation-1: -*No, depreciation doesn’t affect the internal rate of return. Depreciation is calculated in the future periods, and it doesn’t affect the present cash flow of a company. So depreciation is not included in the calculation of the Internal Rate of Return (IRR).
Detailed explanation-2: -Internal rate of return (IRR) is the percentage of returns that a project will generate within a period to cover its initial investment. It is attained when the Net Present Value (NPV) of the project amounts to zero. An IRR higher than the discount rate signifies a profitable investment opportunity.
Detailed explanation-3: -The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project zero. In other words, it is the expected compound annual rate of return that will be earned on a project or investment.
Detailed explanation-4: -Generally, the higher the IRR, the better. However, a company may prefer a project with a lower IRR, as long as it still exceeds the cost of capital, because it has other intangible benefits, such as contributing to a bigger strategic plan or impeding competition.