Which of the following are problems in using net present value to appraise an investment? 1. The difficulty of estimating future cash flows 2. The difficulty of selecting an appropriate discount rate 3. It does not take account of inflation. 4. The concept of net present value is difficult for non-accountants to understand. 1, 2, 3 and 4 1 and 2 only 1, 2 and 3 only 1, 2 and 4 only

Which of the following are problems in using net present value to appraise an investment? 1. The difficulty of estimating future cash flows 2. The difficulty of selecting an appropriate discount rate 3. It does not take account of inflation. 4. The concept of net present value is difficult for non-accountants to understand. 1, 2, 3 and 4 1 and 2 only 1, 2 and 3 only 1, 2 and 4 only

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 16MC: When using the NPV method for a particular investment decision, if the present value of all cash...

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Practice : a: The computation of return on average investment ignores one characteristic of the earnings stream, which is considered in discounting cash flows. What is this characteristic? Why is it important? b: What are the disadvantages of evaluating an investment using payback period? Why might a company use this methodology despite these disadvantages?
The two cardinal rules that financial analysts should follow to avoid errors are: (1) in the NPV equation, the numerator should use income calculated in accordance with generally accepted accounting principles, and (2) all incremental cash flows should be considered when making accept/reject decisions for capital budgeting projects.
Which of the following statements is false? (You may select more than one answer.)a. The total-cost and incremental-cost approaches to net present value analysis canoccasionally lead to conflicting results.b. The cost of capital is a screening mechanism for net present value analysis.c. The present value of a dollar increases as the time of receipt extends further intothe future.d. The higher the cost of capital, the lower the present value of a dollar received inthe future.
Which of the following statements is CORRECT? a. One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money. b. One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital. c. One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until sometime in the future. d. One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects. e. One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life.
Which statement characterizes the time value of money concept? A) The future value of a present dollar is less than one dollar.B) The present value of a future dollar is less than one dollar.C) The timing of cash flows is not relevant to decision making.D) None of the above
The principal of the time value of money is probably the single most important concept in financial management. One of the most frequently encountered applications involves the calculation of a future value. A. The process for converting present values into future values is called . This process requires knowledge of the values of three of four time-value-of-money variables. Which of the following is not one of these variables? The inflation rate indicating the change in average prices The duration of the investment (N) The interest rate (I) that could be earned by invested funds The present value (PV) of the amount invested B. Investments and loans base their interest calculations on one of two possible methods: the interest and the. interest methods. Both methods apply three variables—the amount of principal, the interest rate, and the investment or deposit period—to the amount deposited or invested in order to compute…
Which of the following statements are true regarding the payback period of an investment? It does not account for the time value of money No objective criteria exists for what is an acceptable payback period Cash flows occurring after the payback period have no impact on the payback computation All of the above
13. Consider the following two statements: Statement 1: If nominal cash flows are used in investment appraisal, you must discount to their present values using the real cost of capital Statement 2: The nominal discount rate does not include inflation. Which one of the following combinations (true/false) relating to the above statement is correct? A. Statement 1 : True Statement 2 : True B. Statement 1 : True Statement 2 : False C. Statement 1 : False Statement 2 : False D. Statement 1 : False Statement 2 : True
9. Which of the following statements is CORRECT? Group of answer choices One defect of the IRR method is that it does not take account of the cost of capital. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future. One defect of the IRR method is that it does not take account of the time value of money. One defect of the IRR method is that it does not take account of cash flows over a project's full life. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.
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Which of the following items describes a weakness of the internal rate-of-return method?a. The internal rate of return is difficult to calculate and requires a financial calculator or spreadsheet tool such as Excel to calculate efficiently.b. Cash flows from the investment are assumed in the IRR analysis to be reinvested at the internal rate of return.c. The internal rate-of-return calculation ignores time value of money.d. The internal rate-of-return calculation ignores project cash flows occurring after the initial investment is recovered.
When using the NPV method for a particular investsment decision, if the present value of all cash inflows is greater than the present value of all cash outflows, then ________. Group of answer choices A. the discount rate used was too high B. the investment provides an actual rate of return greater than the discount rate C. the investment provides an actual rate of return equal to the discount rate D. the discount rate is too low