Explanation

IRR (Internal Rate of Return) is used primarily in Finance to evaluate the viability and profitability of investments, projects, and capital expenditures.

It helps financial analysts and investors determine the rate of return on an investment.

Explanation

Inventory costing method (FIFO, LIFO, Average, Specific ID) affects COGS, impacting gross profit and net income.

How the choise of inventory costing method affects COGS:

• FIFO: Low COGS, High GP
• LIFO: High COGS, Low GP
• Average Cost: Middle ground
• Specific ID: Actual cost of items sold

Explanation

IRR requires forecasting future cash flows.

It can be uncertain and subject to errors, making it a drawback of the metric.

This can lead to inaccurate calculations and decisions based on flawed assumptions.

Explanation

COGS (Cost of Goods Sold) directly affects profitability by reducing revenue and influencing gross profit margin.

A lower COGS indicates higher profitability, while a higher COGS reduces profitability.

This making it a key metric for evaluating a company's financial health.

Explanation

Specific Identification inventory costing method:

• Matches actual physical flow of goods
• Tracks exact cost of each item sold
• Used for unique or high-value items
• Examples: luxury cars, fine art
• Accurately matches cost with sale

Explanation

Manufacturing overhead costs include indirect costs associated with production, such as:

• Depreciation of factory equipment (as in this question)
• Factory utilities
• Indirect labor
• Quality control costs
• Factory rent

Explanation

Sales commissions are selling expenses, not directly related to production.

Therefore are not included in COGS (Cost of Goods Sold).

Explanation

The principal is the initial amount of money borrowed or invested, before interest is added or earned.

It is the base amount used to calculate interest.

It is often referred to as the original investment or loan amount.

Explanation

Compound interest: Interest on both principal and accrued interest, resulting in exponential growth.

Compound interest is earned on the initial principal and the accumulated interest from previous periods.

Explanation

A major benefit of using NPV for project evaluation is that it provides an objective profitability measure.

It allowing for a clear and concise comparison of projects.