Question

Describe the condition of the company if there are several financial indicators as follows:

• Payback Period is longer than the bank loan period

• Positive NPV

• IRR is greater than the loan interest rate

Will you accept the project?

Answer 1

Answer:

Yes, i will accept this project

Explanation:

* Payback Period

Payback Period is longer than the bank loan period

The payback period is the expected number of years of operation required to recover an initial investment. Generally the project with smaller payback period is accepted and with larger payback period is rejected in a portfolio. here the payback period is longer than the bank loan period. Whether the Payback period is smaller than or larger than the bank loan period is not a consider else it is directly related to the life of the project.

* NPV

Positive NPV

NPV is the most routinely used capital budgeting tool. The basic rule of deciding a project is that, accept a project with NPV greater than 1 and reject the projects with NPV less than 1. Here the NPV is positive; hence the project can be accepted. Generally in portfolio if there are only limited budget the projects with highest will be selected and if budget is unlimited all projects with positive NPV will be accepted.

* IRR

IRR is greater than the loan interest rate

IRR is the interest rate or discount rate at which the NPV = zero, in other words the rate at which the present value of cash outlay and inflow are equal. The basic rule of deciding a project is that , accept a project with IRR greater than the discount rate or cost of capital and reject the projects with IRR less than the discount rate or cost of capital. Here the IRR is higher than the discount rate or the bank loan interest rate. hence the project can be accepted.