The discount rate is
A) the rate used to compute payback.
B) the rate used to compute the accounting rate of return.
C) the rate used to compute the internal rate of return.
D) the rate used to compute NPV.

Question

Quizplus · Accepted Answer

The discount rate is used to calculate the present value of future cash flows in order to compute the net present value (NPV) of an investment. Therefore, option D - the rate used to compute NPV - is the best choice. Option A is incorrect because the payback period does not take into account the time value of money and does not require a discount rate. Option B is incorrect because the accounting rate of return is based on accounting earnings rather than cash flows and is calculated as a percentage of the initial investment, not a present value calculation. Option C is incorrect because the internal rate of return (IRR) is the discount rate that makes the NPV of an investment equal to zero, so it is a result of the NPV calculation, not a rate used to compute it.

The Discount Rate Is