What is the rate at which the net present value of an investment equals zero?

What is the rate at which the net present value of an investment equals zero quizlet?

Terms in this set (11) The discount rate that makes the net present value of an investment exactly equal to zero is called the: external rate of return.

What is the rate at which the NPV is equal to zero?

Internal rate of return (IRR)

The internal rate of return of a project is the discount rate that would yield a net present value of zero, i.e., the rate of interest which makes the present value of the estimated cash inflow equal to the present value of the cash outflow required by the investment.

Why is NPV 0 at IRR?

IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. IRR calculations rely on the same formula as NPV does. Keep in mind that IRR is not the actual dollar value of the project. It is the annual return that makes the NPV equal to zero.

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What is the difference between the present value of an investment and its cost?

The difference between the present value of an investment and its cost is the: net present value. … The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the: payback period.

What will increase the net present value of a project?

The net present value of a project will increase if: the required rate of return increases. the initial capital requirement increases. … You are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years.

What does IRR of 0 mean?

the IRR is the discount rate that makes the NPV=0,i.e. no profit, and no loss. or the highest capital cost a project can bear in order to not loss money. in NPV profile, when IRR =0, the NPV is also 0, the curve is at origin.

Why is NPV better than IRR?

The advantage to using the NPV method over IRR using the example above is that NPV can handle multiple discount rates without any problems. Each year’s cash flow can be discounted separately from the others making NPV the better method.

Is the process of analyzing alternative long term investments?

Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

What is the time value of money principle?

The time value of money (TVM) is the concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim. This is a core principle of finance.

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Which of the following is an objective of capital budgeting?

One of the objectives of capital budgeting is to earn a satisfactory return on investment.