Question

22.

Projects with shorter payback periods have higher risk, as the company has less time to respond to unanticipated changes.

True or False

23.

If the internal rate of return (IRR) of an investment is lower than the hurdle rate, the project should be rejected.

True or False

Answer 1

22.

False:

Payback period is simply the amount of time a project will recover its initial investment.

The shorter the payback period better it is as the company is able to recover its inital investments as there will be less risk of unrecovery from the project fpr the comapny.

And without worrying about its investments , the company will be able to respond to changes accordingly because it will be hoping the project to deilver as the payback from the project was completed very early and there will be hope that the project will be a success,

23.

True:

The project should be rejected if the IRR is lower than the hurdle rate.

The IRR is the expected rate of return for an investment project. it is calculated as the discount rate that equate present value of a project's expected cash inflow to the present value of project's outflows-in other words the discount rate at which NPV is zero.

If a project;s IRR is greater than the required rate of return , the cost of capital , the project is accepted and vice-a-versa.

However , the IRR method does have drawbacks especially when a project;s cash flow are unconventional.