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Define the following investment rules. In your definition state the criteria for accepting or rejecting an investment. (a) Payback period (b) Internal rate of return

Define the following investment rules. In your definition state the criteria for accepting or rejecting an investment.
a) Payback period
b) Internal rate of return
c) Profitability index

Answers

Charles
a) Payback period
The number of years required to recover the initial outlay of the investment.

Acceptance rule
Accept if the payback is less than standard payback
Reject if the payback is greater than standard payback

b) Internal Rate of Return(IRR)
IRR is the discount rate which equates the present value of an investments cashflows and outflows.

Acceptance rule
Accept if IRR is greater than cost of capital
Reject if IRR is less than cost of capital

C) Profitability index
The ratio of the present value of of the cashflows to the initial outlayof the profitability index or cost benefit rate.

Acceptance rule
Accept if profitability index is greater or equal to 1
Reject if profitability index is less than 1
Charles W answered the question on December 27, 2017 at 13:48

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