28...Some of the weaknesses of the Discounted Payback Period method of Capital Budgeting Analysis are (select all that apply): a.Ignores the time value of money (TVM). b.Ignores CFs occuring after the payback period. c.There is no relationship between a given payback and investor wealth maximization. d.It is easy to calculate and understand

28...Some of the weaknesses of the Discounted Payback Period method of Capital Budgeting Analysis are (select all that apply): a.Ignores the time value of money (TVM). b.Ignores CFs occuring after the payback period. c.There is no relationship between a given payback and investor wealth maximization. d.It is easy to calculate and understand

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 5QTD

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The Payback Method in capital budgeting ignores: a The expected future cash flows of the firm. b None of the above. c The initial outlay of the firm. d The rate of time preference of expected future cash flows.
What capital budgeting rule is a simple but imperfect attempt to solve the capital rationing problem? a The profitability index b The accounting rate of return c The payback rule d The internal rate of return e The net present value rule
Which of the following statement about the payback period method for capital budgeting decisions is not correct? The paybackperiod method ignores the time valueof money. A shorter payback period does not always mean that one investment is more desirable than another. When the annual net cash inflow isthe same each year, the payback period = Investment required/Annual netcash inflow. When the net cash flows change from year to year, the payback period = Investment required/Average netcash inflow per year.
Explain how inflation impacts capital budgeting analysis. Why do we care? How is NPV impacted if you neglect to adjust for inflation in the cash flows when you use a discount rate based upon market (nominal) rates. Does it make the project look better or worse? Explain fully.
What is the main disadvantage of discountedpayback? Is the payback method of any realusefulness in capital budgeting decisions?
1. Why is the NPV considered to be theoretically superior to all other capital budgeting techniques?Reconcile this result with the prevalence of the use of IRR in practice. How would you respond toyour CFO if she instructed you to use the IRR technique to make capital budgeting decisions onprojects with cash flow streams that alternate between inflows and outflows?
What is the major criticism of the payback and simple rate of return methods of making capital budgeting decisions?
27...NPV is the best tool to use for capital budgeting because: a.It uses the IRR to discount cash flows as opposed to using the WACC. The IRR is a more appropriate discount rate. b.It provides a direct measure of the value that the project adds to shareholder wealth and properly considers the Time Value of Money. c.It can not handle non-normal cashflow streams. d.NPV isn't the best tool to use for capital budgeting.
16. The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if: A) it calculates a negative NPV for the proposal. B) the proposal has a different degree of risk. C) the company has unique risk. D) the company expects to earn more than the risk-free rate.
Risk in cash flow estimating for capital budgeting can be defined as: a. the chance that a cash flow will turn out to be worse than the estimate. b. the chance that a cash flow will turn out to be different than the estimate, either better or worse. c. the chance that the cash flows that turn out to be more favorable than the estimate won't totally offset the cash flows that turn out to be worse than the estimate. d. the chance that the NPV and/or IRR will turn out to be worse than the estimate. e. all of the above describe the risk in cash flow estimating.
Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. The discounted payback period does not take the project’s entire life into account. The discounted payback period does not take the time value of money into account. The discounted payback period is calculated using net income instead of cash flows.
What is the major short coming of using the payback period as the only criterion in making capital budgeting decisions?