Question

Without a computer and special calculator, ________.

A) computing the payback period is much more difficult than computing the IRR

B) finding the IRR will typically be a very easy process

C) finding the IRR may be a very tedious process only if the NPV is negative

D) finding the IRR may be a very tedious process since it is an iterative process

Answer 1

At IRR, we have NPV = 0

Here, r will be IRR

Payback Period is the time in which the business will gets its investment back. There are multiple ways to calculate Payback period.

In case we have even cash flows for the project, then the formula is

Payback period = Initial Investment / Annual Cash flow

In case we have non-even cash flows for the project, we can cumulative cash flows method.

Option A)

As we can see that calculation of payback period will me much easier as compared to calculating IRR (look at formulas and think logically). So computing payback period will be easier than computing IRR without a calculator/computer.

Hence this statement is FALSE.

Option B)

Finding IRR is never an easy task even with a computer/calculator. Hence, this is FALSE that finding IRR will be an easy process.

Option C)

Finding IRR is never an easy task even with a computer/calculator. It does not matter whether the NPV is positev or negative. Hence, this is FALSE.

Option D) - CORRECT ANSWER

As you can see from the IRR formula we need to find "r". Without a computer or a calculator, it will be very tough to solve the equation. It involves hit and trial method as we need to find such an "r" for which NPV = 0.

Hence, this is the CORRECT OPtion.