A. The Net Present Value of a project is the expected monetary gain or loss from a project when all the expected future cash inflows and outflows are discounted to the present point in time, using the required rate of return. Since it is a monetary amount, it cannot be approximated by the Payback Reciprocal, which is a ratio.
B. The Payback Reciprocal is 1/Payback Period. (Note: the reciprocal of any number is the number which, when multiplied by the first number, returns a product of 1.) The payback reciprocal can be used to approximate the internal rate of return if (1) the cash flows are equal in every period, and (2) the project's life is at least twice as long as the Payback Period.
C. The Accounting Rate of Return is the ratio of the amount of increased book income to the required investment. Thus it is based upon accrual net income, whereas the Payback Method and the Payback Reciprocal are based upon cash flow.
D. The Profitability Index is a benefit-cost ratio. It is the ratio of the present value of net future cash flows to the amount of the initial investment. It cannot be approximated by means of the Payback Reciprocal.
