B2-M9

Question 1

Internal Rate of Return (IRR)

Answer 1

• Discount rate @ which the PV of the cash inflows= PV of cash outflows
• Interest rate that yields NPV= to 0
• time adjusted rate of return
• Focuses on %

Question 2

Payback Period Method

Answer 2

• time required for the net after-tax operating cash inflows to recover the initial investment in a project
• ignores the time value of money
• ignores profitability (cash flows after payback period)

Question 3

Payback period formula

Answer 3

Net initial investment/ Annual net after-tax cash flow