Question

Match the following:
1. Accounting rate of return
2. Internal rate of return
3. Payback
4. Net present value
a. Is only concerned with the time it takes to get cash outflows returned.
b. Considers operating income but not the time value of money in its analyses.
c. Compares the present value of cash outflows to the present value of cash inflows to determine investment worthiness
d. The true rate of return an investment earns.

Answer 1

Answer:

Explanation:

1. Accounting rate of return - considers operating income but not the time value of money in its analysis. It is calculated using this formula = (Average annual profit / average investment)

2. Internal rate of return - the true rate of return an investment earns. It is also the rate of return that makes the NPV equal to zero.

3. Payback - Is only concerned with the time it takes to get cash outflows returned. Is usually in terms of years

4. Net present value - compares the present value of cash outflows to the present value of cash inflows to determine investment worthiness. This is done at a certain discount rate or WACC (weighted average cost of capital)