Question

Marginal efficiency of capital or yield on investment is called:

• A. NPV
• B. Payback period
• C. IRR
• D. BCR

Hint:

Exam Tip:
IRR: The rate at which the NPV is zero.
Keynesian Concept: Marginal Efficiency of Capital is the same as IRR.
Decision Rule: Invest if IRR \(>\) Cost of Capital.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
This question tests knowledge of investment appraisal techniques. Marginal Efficiency of Capital is a concept introduced by J.M. Keynes.

Step 2: Defining Key Terms:
Let's define each term:
• NPV (Net Present Value): The difference between the present value of cash inflows and the present value of cash outflows over a period of time.
• Payback Period: The time required to recover the initial investment.
• IRR (Internal Rate of Return): The discount rate that makes the NPV of a project equal to zero. It is also known as the marginal efficiency of capital or the yield on investment.
• BCR (Benefit-Cost Ratio): The ratio of the present value of benefits to the present value of costs.

Step 3: Analyzing the Definition:
The question states: "Marginal efficiency of capital or yield on investment is called..."
In economics, the Marginal Efficiency of Capital (MEC) is defined as the expected rate of return on an additional unit of capital.
This is exactly the definition of the Internal Rate of Return (IRR).
Keynes defined MEC as the rate of discount that would make the present value of the expected returns from a capital asset equal to its supply price.

Step 4: Final Answer:
Marginal efficiency of capital or yield on investment is called IRR. Therefore, option (C) is correct.