The payback period, internal rate of return , profitability index and net present value of the project NP and NX. Payback Period: It is ascertained when cost of project is divided by the annual cash flows of the respective project. The payback period is a method used in capital budgeting. It does not involve the time value of money factor. Internal Rate of Return (IRR): IRR is also a technique of capital budgeting that includes the time value of money concept. The IRR of a project is shows as the profitability arises from the project. The IRR of a project is calculated with the help of NPV calculations. Profitability Index (PI): The profitability index measure the return from the investment , the investor can calculate the return with the help of this index. If the profitability index is more than one it should be selected and if it is less than one then the project is rejected. Net Present Value (NPV): NPV is a technique used in capital budgeting to see the project is profitable for the company or not. The selection is based on the result of NPV as if it is positive then it should be selected and in the case of negative NPV it should be rejected.

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Chapter 5, Problem 19QP

Summary Introduction

To determine: The payback period, internal rate of return, profitability index and net present value of the project NP and NX.

Payback Period:

It is ascertained when cost of project is divided by the annual cash flows of the respective project. The payback period is a method used in capital budgeting. It does not involve the time value of money factor.

Internal Rate of Return (IRR):

IRR is also a technique of capital budgeting that includes the time value of money concept. The IRR of a project is shows as the profitability arises from the project. The IRR of a project is calculated with the help of NPV calculations.

Profitability Index (PI):

The profitability index measure the return from the investment, the investor can calculate the return with the help of this index. If the profitability index is more than one it should be selected and if it is less than one then the project is rejected.

Net Present Value (NPV):

NPV is a technique used in capital budgeting to see the project is profitable for the company or not. The selection is based on the result of NPV as if it is positive then it should be selected and in the case of negative NPV it should be rejected.

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