Question

which one of the following statements is true? payback uses the same discount rate as that applied in the npv calculation. financing projects can only ever have one irr. you must have a discount rate to compute npv, irr, pi, and discounted payback. you must know the discount rate to compute the npv but not the irr. financing projects are acceptable if the npv is negative

Answer 1

The true statement is that the NPV requires a known discount rate to compute, while the IRR does not require a pre-determined discount rate and is the rate that makes the NPV equal to zero. A project can have multiple IRRs, and a negative NPV implies a project is not financially viable.

Step-by-step explanation:

The statement 'you must know the discount rate to compute the NPV but not the IRR' is the true statement among the options provided. To compute the Net Present Value (NPV), it is essential to have a discount rate, which is used to bring future cash flows to their present value.

However, the Internal Rate of Return (IRR) is the discount rate at which the NPV of all cash flows from a particular project equals zero, and it is found by iteration; therefore, it does not require a previously known discount rate.

Moreover, a single project can have multiple IRRs if it has alternating positive and negative cash flows over its lifetime. It is important to note that financing projects are not considered acceptable if the NPV is negative, as a negative NPV indicates the project's cash flows do not generate a sufficient return to offset the investment cost.