Question

Rennin Dairy Corporation is considering a plant expansion decision that has an estimated useful life of 20 years. This project has an internal rate of return of 15% and a payback period of 9.6 years. How would a decrease in the expected salvage value from this project in 20 years affect the following for this project?

	Internal Rate of Return	Payback Period
A)	Decrease	Decrease
B)	No effect	Decrease
C)	Decrease	No effect
D)	Increase	No effect
E)	No effect	No effect

Multiple Choice

• Choice A

• Choice B

• Choice C

• Choice D

Answer 1

The right answer choice is “Choice-C, Decrease, No effect”

-Internal rate of return (IRR) is the rate of return at which the present value of the future annual cash inflows is equals to the present value of the cash outflows

-The IRR considers all the relevant future cash flows for the project from all the relevant future years.

-The Payback Period Method refers to the period in which the proposed project will generate the cash inflows to recover the Initial Investment costs. In Capital Budgeting Method, The Payback Period method does not use the concept of Time Value of money.

-This method considers all the cash inflows and outflows till the time when the project paybacks.

-Payback period is the number of years taken to recover the total amount of money invested in the project. If the payback period is less than the enterprises required number of years, then the project should be accepted, Else it is rejected. In the Discounted Payback Period Approach, it considers the concept of time value of money.