Question

You must know the discount rate to compute ____, while the discount rate is necessary to apply ___.

a) IRR, NPV
b) NPV, IRR
c) Payback period, NPV
d) IRR, Payback period

Answer 1

The discount rate is essential for calculating Net Present Value (NPV), and it is also used in determining the Internal Rate of Return (IRR), making option b) NPV, IRR the correct answer.

Step-by-step explanation:

You must know the discount rate to compute Net Present Value (NPV), while the discount rate is necessary to apply the Internal Rate of Return (IRR). Therefore, the correct answer is b) NPV, IRR.

The Net Present Value is the value of all future cash flows over the entire life of an investment discounted to the present. To calculate NPV, you need to know the discount rate, which reflects the expected rate of return. The Internal Rate of Return is a discount rate that makes the NPV of all cash flows from a particular project equal to zero. IRR is used to evaluate the attractiveness of an investment or project. Knowing the discount rate allows investors to determine the present value of future profits, taking into consideration potential capital gains and dividends.