ECN 104 Study Guide - Cash Flow, Financial Statement, Payback Period

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Lo1 how to compute the net present value and why it is the best decision criterion. Lo2 the payback rule and some of its shortcomings. Lo3 the discounted payback rule and some of its shortcomings. Lo4 accounting rates of return and some of the problems with them. Lo5 the internal rate of return criterion and its strengths and weaknesses. Lo7 the profitability index and its relation to net present value. Answers to concepts review and critical thinking questions. 3. (lo2, 3) a payback period less than the project"s life means that the npv is positive for a zero discount rate, but nothing more definitive can be said. The discounted payback includes the effect of the relevant discount rate. Since discounted payback is calculated at the same discount rate as is npv, if npv is positive, the discounted payback period must be less than the project"s life.

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