Multiple Choice
When interest is earned not only on the principal but also on previously earned interest, it is referred to as:
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10. Time Value of Money
Time Value of Money Equations
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following terms refers to the expected time required to recover the initial investment amount in a project?
A
Internal Rate of Return
B
Payback Period
C
Net Present Value
D
Future Value
Verified step by step guidance1
Understand the concept of Payback Period: The Payback Period is the time it takes for the cash inflows from a project to equal the initial investment. It is a simple measure of investment recovery and does not account for the time value of money.
Compare the given terms: Internal Rate of Return (IRR) is the discount rate at which the Net Present Value (NPV) of cash flows equals zero. Net Present Value (NPV) is the difference between the present value of cash inflows and outflows. Future Value refers to the value of an investment at a specific point in the future, considering compound interest.
Identify the term that matches the definition: Among the options provided, Payback Period specifically refers to the expected time required to recover the initial investment amount in a project.
Clarify why other terms do not fit: IRR, NPV, and Future Value involve more complex calculations and considerations, such as the time value of money, which are not directly related to the simple recovery of the initial investment.
Conclude that the correct term is Payback Period, as it directly aligns with the definition provided in the question.
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