b . " I like the payback rule . As long as the minimum payback period is short , the rule makes sure that the company takes no borderline projects . That reduces risk ."
Problem 5-16
Some people believe firmly , even passionately , that ranking projects on IRR is OK if each project ' s cash flows can be reinvested at the project ' s IRR . They also say that the NPV rule " assumes that cash flows are reinvested at the opportunity cost of capital ." Think carefully about these statements . Are they true ? Are they helpful ?
Problem 6-2
Mr . Art Deco will be paid $ 100,000 one year hence . This is a nominal flow , which he discounts at an 8 % nominal discount rate :
PV = 100,000 / 1.08 = $ 92,593
The inflation rate is 4 %.
Calculate the PV of Mr . Deco ’ s payment using the equivalent real cash flow and real discount rate . ( You should get exactly the same answer as he did .)