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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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