Question

Which of the following is true for a 5-year project with a 3-year payback period?

The net present value is negative.

The net present value is zero.

Initial screening reveals this to be an acceptable project.

The net present value is positive.

Answer 1

For this , let us understand the basic Terms given in this question :

1) PAY BACK PERIOD : Payback period is the time required to recover the initial cost of an investment. It is the number of years it would take to get back the initial investment made for a project.

2) Net Present Value : Net present value is the difference between the present value of cash inflows and the present value of cash outflows that occur as a result of undertaking an investment project.

In this question :

project life is 5 year and payback period is 3 year , that simply means our investment/money will return back in less than 5 year ie in 3 year and for remaining 2 year , we will earn extra income .

Now if we earn extra income , that means our NPV cannot became negative , therefore option A is invalid/ not applicable.

Now coming on remaining 3 options in this question

NPV is always calculated when Required Rate of return is given .

Therefore Ans is  Initial screening reveals this to be an acceptable project.