Your boss asks you to interpret the internal rate of return on a proposed purcha

Question

Your boss asks you to interpret the internal rate of return on a proposed purchase of a home improvement store in Salt Lake City. You tell her that it represents the: Maximum rate of return a firm expects to earn on a project. Rate of return a project will generate if the project in financed solely with internal funds. Discount rate that causes the profitability index for a project to equal zero. Discount rate that equates the net cash inflows of a project to zero. Discount rate which causes the net present value of a project to equal zero.

Mike uses the payback method to evaluate investments in NWC. Which two characteristics likely explain why he has chosen to use the payback method?

Ignores time value of money, ease of use.

Liquidity bias, ease of use.

Liquidity bias, arbitrary cutoff point.

Bill's Blouses has financed its assets with both debt and equity. The weighted average of the firm's cost of equity and after tax cost of debt where the weights are based on the firm's capital structure is called the:

Mike uses the payback method to evaluate investments in NWC. Which two characteristics likely explain why he has chosen to use the payback method?

Explanation / Answer

1. IRR- Discount rate which causes the net present value of a project to equal zero.

2.Payback perod is used becasue of Liquidity bias, ease of use. as the other options like does not consider time value of money, arbitrary cut off point are disadvantages of this method

3. Weighted average cost of capital.

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