FINANCE 601 ACCESS CODE (CUSTOM)
FINANCE 601 ACCESS CODE (CUSTOM)
16th Edition
ISBN: 9781259867668
Author: Ross
Publisher: MCG CUSTOM
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Textbook Question
Chapter 5, Problem 1CQ

Payback Period and Net Present Value If a project with conventional cash flows has a payback period Jess than the project’s life, can you definitively state the algebraic sign of the NPV? Why or why not? If you know that the discounted payback period is less than the project's life, what can you say about the NPV? Explain.

Expert Solution & Answer
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Summary Introduction

To explain: Algebraic sign of NPV and if discounted payback period is less than the project life, then the effect of it on NPV.

Net Present Value (NPV):

Net present value refers to the present value of all the future cash flows that are adjusted according to the time value of money.

Answer to Problem 1CQ

Algebraic sign of NPV is positive in both cases.

Explanation of Solution

When a payback period is smaller than the life of a project, then the net present value (NPV) will be positive. It is because the company will be earning even after they earned back their investment; likewise, in discounted payback period too.

In certain cases where cost of capital is high, it will reduce NPV and make it negative. However, it does not apply in the current situation.

Conclusion

Hence, the sign of NPV in both cases will be positive.

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Chapter 5 Solutions

FINANCE 601 ACCESS CODE (CUSTOM)

Ch. 5 - Net Present Value You are evaluating Project A and...Ch. 5 - Modified Internal Rate of Return One of the less...Ch. 5 - Net Present Value It is sometimes stated that the...Ch. 5 - Prob. 14CQCh. 5 - Calculating Payback Period and NPV Maxwell...Ch. 5 - Calculating Payback An investment project provides...Ch. 5 - Calculating Discounted Payback An investment...Ch. 5 - Calculating Discounted Payback An investment...Ch. 5 - Prob. 5QPCh. 5 - Calculating IRR Compute the internal rate of...Ch. 5 - Calculating Profitability Index Bill plans to open...Ch. 5 - Calculating Profitability Index Suppose the...Ch. 5 - Cash Flow Intuition A project has an initial cost...Ch. 5 - Prob. 10QPCh. 5 - NPV versus IRR Consider the following cash flows...Ch. 5 - Problems with Profitability Index The Coris...Ch. 5 - Prob. 13QPCh. 5 - Comparing Investment Criteria Wii Brothers, a game...Ch. 5 - Profitability Index versus NPV Hanmi Group, a...Ch. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Comparing Investment Criteria The treasurer of...Ch. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Prob. 19QPCh. 5 - NPV and Multiple IRRs You are evaluating a project...Ch. 5 - Payback and NPV An investment under consideration...Ch. 5 - Multiple IRRs This problem is useful for testing...Ch. 5 - NPV Valuation The Yurdone Corporation wants to set...Ch. 5 - Calculating IRR The Utah Mining Corporation is set...Ch. 5 - Prob. 25QPCh. 5 - Calculating IRR Consider two streams of cash...Ch. 5 - Calculating Incremental Cash Flows Darin Clay, the...Ch. 5 - Prob. 28QPCh. 5 - Prob. 1MCCh. 5 - Seth Bullock, the owner of Bullock Gold Mining, is...
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  • 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 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.
    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. Select one: a. The lower the WACC used to calculate it, the lower the calculated NPV will be. b. If a project's NPV is greater than zero, then its IRR must be less than zero. c. The NPV of a relatively low-risk project should be found using a relatively high WACC. d. 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. e. If a project's NPV is less than zero, then its IRR must be less than the WACC.
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