Skip to content

IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal

Which one of the following statements about payback and discounted payback is correct?

The correct statement is that if every cash flow after the discounted payback date is non-negative, the NPV at that rate is non-negative. By that date the present value of inflows already covers the outlay, and later non-negative flows only add to it.

  1. ADiscounted payback is always shorter than simple payback when the interest rate is positive.
  2. BRaising the discount rate shortens the discounted payback period.
  3. CChoosing the project with the shorter simple payback always maximises the net present value.
  4. DIf all cash flows after the discounted payback date are non-negative, the NPV at that rate is non-negative.Correct
  5. Simple payback allows for the time value of money before the payback date.

Explanation

Once cumulative discounted inflows have covered the outlay, later non-negative flows can only add to the present value, so NPV is non-negative. Discounted payback is longer, not shorter, than simple payback for positive rates, and a higher rate lengthens it. Simple payback ignores both timing and later flows.

Did you get it right without looking?

One question tells you little. A timed set on Project appraisal shows your real accuracy, how long you take and where you lose marks.

Practise Project appraisalFree diagnostic mock

More Project appraisal questions