COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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NPV, IRR, PI, and discount payback period
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NPV, PI, discount payback period
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NPV, PI, IRR
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NPV, accounting rate of return, PI, discount payback period
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Detailed explanation-1: -The discount rate will be company-specific as it’s related to how the company gets its funds. It’s the rate of return that the investors expect or the cost of borrowing money. If shareholders expect a 12% return, that is the discount rate the company will use to calculate NPV.
Detailed explanation-2: -1) One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate. EXPLANATION: Net present value is defined as the present value of cash inflows minus initial investment (or cash outflows).
Detailed explanation-3: -NPV (Net Present Value) is calculated in terms of currency while Payback method refers to the period of time required for the return on an investment to repay the total initial investment. Payback, NPV and many other measurements form a number of solutions to evaluate project value.
Detailed explanation-4: -To calculate the payback period you can use the mathematical formula: Payback Period = Initial investment / Cash flow per year For example, you have invested Rs 1, 00, 000 with an annual payback of Rs 20, 000. Payback Period = 1, 00, 000/20, 000 = 5 years.