In capital budgeting, the Payback Method suffers from the problem of:No consideration to sunk costsNo regard for the time value of moneyNo consideration for simple computationNo regard for capital expenditure

Traditional methods: Payback period: This method is used to calculate how many years a project will…

In capital budgeting, the Payback Method suffers from the problem of: No consideration to sunk costs b. No regard for the time value of money No consideration for simple computation P. No regard for capital expenditure

In capital budgeting, the Payback Method suffers from the problem of: No consideration to sunk costs b. No regard for the time value of money No consideration for simple computation P. No regard for capital expenditure

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 1QTD

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

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In capital budgeting, the Payback Method suffers from the problem of:
No consideration to sunk costs
No regard for the time value of money
No consideration for simple computation
No regard for capital expenditure

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Why are interest charges not deducted when a projects cash flows are calculated for use in a capital budgeting analysis?
In capital budgeting, one advantage of the internal rate of return is that it does not require the estimation of the weighted average cost of capital. Your answer must begin with True or False followed by your explanation.
In capital budgeting, a project is accepted only if the internal rate of return equals or: a. exceeds the net present value b. is less than the required rate of return c. exceeds the required rate of return d. exceeds the accrual accounting rate of return
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.
The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it does NOT track cash flows and it ignores the time value of money. O True O False
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Which of the following statement is true? O a. Sunk cost is not relevant in capital budgeting decision O b. Capital budgeting decisions are based on past OC. Capital budgeting decisions are short term in nature O d. Capital Budgeting decisions can be changed anytime
In a capital budgeting analysis, why are interest charges not deducted when a project’s cash flows are calculated?
Which of the following statements is false? A. Net incomes are not cash flows. Financial Managers should focus on the cash flows when making capital budgeting decisions. B. Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision. C. To the extend that overhead costs are fixed and will be incurred in any case, they are not incremental to the project and should be excluded in the capital budgeting analysis. D. Depreciation is not a cash expense paid by the firm. E. None of the above.
What is the major short coming of using the payback period as the only criterion in making capital budgeting decisions?