Question

Rennin Dairy Corporation is considering a plant expansion decision that has an estimated useful life of 20 years. This project has an internal rate of return of 15% and a payback period of 9.6 years. How would a decrease in the expected salvage value from this project in 20 years affect the following for this project? Internal Rate of Return Payback Period A) Decrease Decrease B) No effect Decrease C) Decrease No effect D) Increase No effect E) No effect No effect

Answer 1

Answer:

C. Decrease No Effect.

Explanation:

This could result in decrease in internal rate of return and also has no effect in the payback period.

On the other hand, many factors can cause an investment to have a negative rate of return. Poor performance by a company or companies, turmoil within a sector or the entire economy, and inflation all are capable of eroding the value of the investment. Rate of return is the amount an investment gains (or loses) over a period of time. It is expressed as a percentage of the initial value of the investment.