Question

Which of the following statements is correct?

A project's discounted payback period (DBP) is normally shorter than its traditional payback period (PB) because DPB accounts for the time value of money, whereas PB does not.

To compute the NPV for a project, the firm's required rate of return must be known. To compute a project's internal rate of return (IRR), the firm's required rate of return is not used because the IRR is the discount rate where the project's NPV equals zero.

Two firms could compute different internal rate of return (IRR) for a project if their required rates of return differ. If a project's net present value (NPV) is equal to its internal rate of return (IRR), the project's value is in equilibrium.

Everything else equal, firms with higher required rates of return generally are able to purchase more capital budgeting projects than firms will lower required rates of return.

Answer 1

IRR is the implied rate of return from the project. If NPV is ZERO at IRR, cost of capital will equal the IRR. NPV is PV of cash inflows – PV cash outflows. So, IRR does not require discount rate. Hence, correct option is "To compute the NPV for a project, the firm's required rate of return must be known. To compute a project's internal rate of return (IRR), the firm's required rate of return is not used because the IRR is the discount rate where the project's NPV equals zero.” *Please rate thumbs up