Question

Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project's: Payback Net Present Value Internal Rate of Return
A) No No No
B) Yes Yes Yes
C) No Yes Yes
D) No Yes No

Answer 1

Answer:

The answer is D - No,Yes, No

Explanation:

The payback period is the time it will take the company to recover the initial investment given the estimated cash-flows over the life of the project. This payback period can be calculate even when the company does not yet know the required rate of return to use in its capital budgeting.

Net Present value is the sum of the discounted cash-flows over the life of the project, including the initial outlay. In order to calculate the discounted cash-flows, the required rate of return must be known, and therefore without it, the net present value of the project cannot be calculated.

The internal rate of return  is the rate that equates the sum of the discounted cash-flows to zero. In other words, irrespective of what the required rate of return is, one can calculate this rate that would result in a net present value of zero from the given initial outlay and  cash-flows expected over the life of the project.