For a specific project, a financial manager computes the accounting return, payb

Question

For a specific project, a financial manager computes the accounting return, payback, discounted cash flow valuation, profitability index, and internal rate of return:

Which measure refers to the discount rate that causes the net present value of the project to equal zero?

Which measure examines the length of time it will take for the company to recoup its investment?

Which measure refers to the ratio of the project’s future cash flows to the project’s initial cash outlay?

Which measure is the easiest to compute due to the easy availability of information needed?

Explanation / Answer

1. Internal Rate of Return is the rate that causes the net present value of the project to equal zero.

2. Payback Period measures examines the length of time it will take for the company to recoup its investment.

3. Profitability Index measures refers to the ratio of the project’s future cash flows to the project’s initial cash outlay.

4. Accounting Return measure is the easiest to compute due to the easy availability of information needed.

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