MKTG (with Marketing CourseMate with eBook Printed Access Card)

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CHAPTER 8 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Answers to Concepts Review and Critical Thinking Questions 1. A payback period less than the project’s life means that the NPV is positive for a zero discount rate, butnothing more definitive can be said. For discount rates greater than zero, the payback period will stillbe less than the project’s life, but the NPV may be positive, zero, or negative, depending on whether thediscount rate is less than, equal to, or greater than the IRR. 2. If a project has a positive NPV for a certain discount rate, then it will also have a positive NPV for azero discount rate; thus the payback period must be less than the project life. If NPV is positive, thenthe present value of future cash inflows is greater than the initial investment cost; thus PI must begreater than 1. If NPV is positive for a certain discount rate R, then it will be zero for some largerdiscount rate R*; thus the IRR must be greater than the required return. 3. a. Payback period is simply the break-even point of a series of cash flows. To actually compute thepayback period, it is assumed that any cash flow occurring during a given period is realizedcontinuously throughout the period, and not at a single point in time. The payback is then the pointin time for the series of cash flows when the initial cash outlays are fully recovered. Given somepredetermined cutoff for the payback period, the decision rule is to accept projects that payback before this cutoff, and reject projects that take longer to payback. b.
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