Question

Polo Co. requires higher rates of return for projects with a life span greater than 5 years. Projects extending beyond 5 years must earn a higher specified rate of return. Which of the following capital budgeting techniques can readily accommodate this requirement? Internal Rate of Return Net Present Value A Yes No B No Yes C No No D Yes Yes

Answer 1

Answer:

D) Yes Yes

Explanation:

The internal rate of return measures the profitability of an investment, so if Polo Co. requires a higher rate of return it must use this ration to compare possible projects.

The net preset value determines the current value of future discounted cash flows. Depending on the discount rate, the NPV will change. If Polo Co. requires higher rates of return, it can use a higher discount rate to determine the NPV of a potential project. Only projects with an NPV ≥ 0 should be accepted.