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.)