3. Which of the following statements is CORRECT? Assume that the project being considered has normalcash flows, with one outflow followed by a series of inflows.AnswerOne drawback of the regular payback for evaluating projects is that this method does not properlyaccount for the time value of money.If a project's payback is positive, then the project should be rejected because it must have anegative NPV.The regular payback ignores cash flows beyond the payback pericod, but the discounted paybackmethod overcomes this problem.If a company uses the same payback requirement to evaluate all projects, say it requires a paybackof 4 years or less, then the company will tend to reject projects with relatively short lives and acceptlong-lived projects, and this will cause its risk to increase over time.The longer a project's payback period, the more desirable the project is normally considered to beby this criterion.

Financial Management: Financial management comprises of two words i.e. Finance and management.…

3. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. Answer One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money. If a project's payback is positive, then the project should be rejected because it must have a negative NPV. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and acceot long-lived projects, and this will cause its risk to increase over time. The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.

3. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. Answer One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money. If a project's payback is positive, then the project should be rejected because it must have a negative NPV. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and acceot long-lived projects, and this will cause its risk to increase over time. The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 20E

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Using IRR, a project is rejected if the IRR a. is equal to the required rate of return. b. is less than the required rate of return. c. is greater than the cost of capital. d. is greater than the required rate of return. e. produces an NPV equal to zero.
Using NPV, a project is rejected if it is a. equal to zero. b. negative. c. positive. d. equal to the required rate of return. e. greater than the cost of capital.
Which of the following statements is correct regarding the payback method? Takes account of differences in size among projects. If a project’s payback is positive, then the project should be accepted because it must have a zero NPV. Ignores cash flows beyond the payback period. Has an objective, market-determined benchmark for making decisions. Directly account for the time value of money.
Which of the following is correct? • the shorter a projects payback period, the less desirable the project is normally considered to be by this criterion • one drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period. • if a projects payback is postitive, then the project should be accepted because it must have a positive NPV • the regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem •one drawback of the discounted payback is that this method does not consider the time value of money, while the regular payback overcomes this drawback.
Which one of the following statements is correct concerning the payback rule? a. The payback period is computed using the present value of each of the cash flows. b. The rule says that you should accept a project if the payback period is greater than 1.0. c. The rule is biased in favour of long-term projects. d. The rule is flawed because it ignores all cash flows after some arbitrary point in time.
Which of the following is CORRECT? Select one: a. If the NPV of a project is negative, the IRR for the project must also be negative. b. A project's MIRR can never exceed its IRR. c. If a project with normal cash flows has an IRR less than WACC, the project must have a positive NPV. d. If Project 1's IRR exceeds Project 2's IRR, then 1 must have a higher NPV than 2. e. If a project with normal cash flows has an IRR greater than WACC, the project must have a positive NPV. You purchase a house for $250,000. After you make your down payment of $50,000, you are financing $200,000 for 30 years at an annual percentage rate of 5.4%. How much are your monthly payments? Select one: a. Less than $1,000 b. Between $1,000 and $1,050 c. Between $1,050 and $1,100 d. Between $1,100 and $1,150 e. Greater than $1,200
Which of the following statements concerning the payback period, is not true? a. The payback period measures the time that a project will take to generate enough cash flows to cover the initial investment.incorrect b. the payback period involves a simple method c. the payback period takes into account the time value of money d. the payback period ignores cash flows
Which of the following statements is CORRECT? a. If a project with normal cash flows has an IRR greater than the cost of capital, the project must also have a positive NPV. b. If a project with normal cash flows has an IRR less than the cost of capital, the project must have a positive NPV. c. If the NPV is negative, the IRR must also be negative. d. A project's MIRR can never exceed its IRR. e. If Project A's IRR exceeds Project B's, then A must have the higher NPV.
Which are problems of the payback criterion? Check all that apply: It ignores cash flows after the cutoff date. It ignores the time value of money. It doesn't show the value created by a project. It doesn't fully reflect the risk of a project. It uses an arbitrary cutoff value. It is difficult to calculate.
Which of the following is a disadvantage of the IRR project evaluation method? Select one: a. It does not take into account the time value of money. b. If there are negative cash flows after positive cash flows, there may be zero or multiple internal rates of return. c. It does not make adequate allowance for risk. d. It focuses on accounting profit rather than cash flow as the source of value.
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. b. The NPV of a relatively low-risk project should be found using a relatively high WACC. c. If a project's NPV is less than zero, then its IRR must be less than the WACC. d. The lower the WACC used to calculate it, the lower the calculated NPV will be. e. If a project's NPV is greater than zero, then its IRR must be less than zero.
What are the three potential flaws with the regular payback method? Does the discounted payback method correct all three flaws? Explain. Why is the NPV of a long-term project (one for which a high percentage of its cash flows occur in the distant future) more sensitive to changes in the WACC than that of a short-term project?