The net present value and internal rate of return methods of capital budgeting a

Question

The net present value and internal rate of return methods of capital budgeting are superior to the payback method because they:

are easier to implement.

consider the time value of money.

require less data.

reflect the

Ignore income taxes in this problem.) A company with $600,000 in operating assets is considering the purchase of a machine that costs $72,000 and which is expected to reduce operating costs by $18,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to:

4 years

8.3 years

0.25 years

33.3 years

effects of depreciation and income taxes.

Explanation / Answer

Answer 1. Correct Answer : consider the time value of money. NPV and IRR are calculated by taking cash inflow and outflow by taking time value of money. The future cash inflow and outflow are discounted at the market rate of interest to get the correct Value. Answer 2. Correct Answer - 4 Years Payback period = $72000 (Capital Investment) / $18000 (Cash Inflow) Payback period = 4 Years

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