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    Question

    Project Z costs ₹10 crore; it yields ₹3 crore

    annually for 4 years and ₹5 crore in Year 5. Cost of capital is 10%. Which statement is true?
    A Fast payback but low NPV Correct Answer Incorrect Answer
    B Longer payback but higher NPV Correct Answer Incorrect Answer
    C Both payback and NPV favorable Correct Answer Incorrect Answer
    D Both payback and NPV unfavorable Correct Answer Incorrect Answer
    E Can't say without IRR Correct Answer Incorrect Answer

    Solution

    Lower early cash flows extend payback, but substantial terminal year cash flow can produce a positive NPV when discounted properly.

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