The simple payback period of a measure is the investment divided by the
Answer: A
It answers the single question of how long the money is at risk, in years, and it needs no discount rate or project life. Its appeal is that anybody can compute and understand it, which is why it remains the commonest criterion in practice.
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Simple payback ignores
Answer: B
A measure paying back in three years and then failing is ranked equally with one paying back in three years and running for twenty, which is the criterion's fundamental defect. It also ignores the time value of money entirely.
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Two measures have the same payback but different lives. Simple payback
Answer: C
Correct answer: cannot distinguish between them
Payback stops counting at the moment the capital is recovered and takes no account of anything after it, so a measure lasting four years and one lasting fifteen look identical if both pay back in two. That blindness to project life is the criterion’s principal defect, and it is why net present value is needed to rank them.
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The chief practical merit of simple payback is that it
Answer: D
Arguing about the right discount rate can delay a decision longer than the measure would take to pay back, and payback sidesteps it. That convenience is why it survives as a screening tool alongside the more rigorous measures.
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The time value of money means that a rupee received in a year's time is worth
Answer: A
Correct answer: less than a rupee today
A rupee today can be invested and will be worth more than a rupee in a year, so a rupee promised for next year must be worth less now. This holds even with no inflation at all, since the opportunity to earn a return exists regardless - inflation reduces the real value further but is not the cause.
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The discount factor for a sum received \( n \) years hence at a rate \( i \) is
Answer: B
Multiplying a future amount by it gives the present value, and the factors fall away steeply: at ten per cent a sum ten years out is worth 0.386 of its face value. Summing the factors over the life gives the annuity factor.
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The annuity or present worth factor for a constant annual saving is
Answer: C
Correct answer: the sum of the individual discount factors over the life
A level annual saving is a series of payments, each discounted from its own year, so the factor converting the whole stream to a present value is the sum of those individual factors. Written in closed form it is \( [1-(1+i)^{-n}]/i \), and the capital recovery factor is its reciprocal.
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Net present value is computed as the present value of the benefits less the
Answer: D
Correct answer: present value of the costs, the initial investment included
\[ NPV = \sum \frac{\mathrm{benefits}}{(1+i)^t} - \sum \frac{\mathrm{costs}}{(1+i)^t}. \] The initial investment is a cost at year zero, so it enters undiscounted. A positive result means the project earns more than the discount rate applied to it.
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A project with a positive net present value at the company's discount rate
Answer: A
The discount rate already represents the return the money could earn elsewhere, so beating it is the test of worth. A negative value does not mean the project loses money, only that it earns less than the alternative use of the capital.
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The internal rate of return of a project is the discount rate at which its
Answer: B
It expresses the project's earning power as a percentage, which management often finds easier to compare against a borrowing cost than a present value in rupees. It is found by iteration or by interpolation between two trial rates.
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