Explanation

IRR is best for long-term capital investments.

It helps evaluate viability and return on investment for projects with long cash flow periods.

Explanation

If IRR equals the cost of capital, it means Breakeven.

This indicates that the project's returns are just sufficient to cover the cost of capital, resulting in neither profit nor loss.

The project is essentially breaking even, and investment in it may not be particularly attractive.

Explanation

The formula to calculate IRR is NPV = 0, which is:

0 = ∑ (CFt / (1 + IRR)^t) - Initial Investment

Where:

• CFt = Cash flow at time t
• IRR = Internal Rate of Return
• t = Time period

Explanation

Factory manager's salary is manufacturing overhead.

An indirect cost not directly related to producing a specific unit.

Including salaries of supervisors, quality control, and support staff.

Explanation

Sales office rent is a period cost, which means it is an expense that is not directly related to the production or manufacturing process.

It is an administrative expense, and therefore not part of COGS (Cost of Goods Sold).

Explanation

An increase in COGS (Cost of Goods Sold) decreases gross profit.

Gross profit is calculated by subtracting COGS from net sales:

Gross Profit = Net Sales - COGS

If COGS increases, the difference between net sales and COGS decreases, resulting in a lower gross profit.

Explanation

Operating profit, also known as Earnings Before Interest and Taxes (EBIT).

Operating profit: Profit from core business operations, excluding interest and taxes.

Explanation

Net profit is calculated after deducting Operating expenses, Taxes, and Interest from gross profit.

This is the final profit figure, also known as the bottom line.

It represents the earnings of a business after considering all expenses.

Explanation

The effect of using a higher discount rate on a project's NPV is to decrease NPV.

As it reduces the present value of future cash flows, making the project less valuable.

This is because a higher discount rate implies a higher opportunity cost of capital.

Explanation

If the discount rate increases, NPV decreases.

As higher discount rates reduce the present value of future cash flows.

This making the investment less valuable due to higher opportunity cost or risk.