1. A problem associated with the payback method is:
a. it usually requires less time to compute than that required by the net present value method
b. it doesn't consider cash flows after the payback period
c. it assumes that all cash flows are invested at the cost of capital
d. it uses the time value of money concept
30. Which of the following describes the impact of a real option on the value of an investment
opportunity?
A) real options add value to investment opportunities only when exercised
B) real options add value to investment opportunities
C) real options add value to investment opportunities but they are already included in the
discount rate so they should not be added as incremental cash flows.
D) real options increase the costs of investment opportunities because suppliers charge extra for
these options.
37. If projects X and Y are independent, which should be accepted?
A) Project X only
B) Project Y only
C) Neither project
D) Both projects
38. If projects X and Y are mutually exclusive, which should be accepted?
A) Project X only
B) Project Y only
C) Neither project
D) Both projects
1. A problem associated with the payback method is:
a. it usually requires less time to compute than that required by the net present value method
b. it doesn't consider cash flows after the payback period
c. it assumes that all cash flows are invested at the cost of capital
d. it uses the time value of money concept
30. Which of the following describes the impact of a real option on the value of an investment
opportunity?
A) real options add value to investment opportunities only when exercised
B) real options add value to investment opportunities
C) real options add value to investment opportunities but they are already included in the
discount rate so they should not be added as incremental cash flows.
D) real options increase the costs of investment opportunities because suppliers charge extra for
these options.
37. If projects X and Y are independent, which should be accepted?
A) Project X only
B) Project Y only
C) Neither project
D) Both projects
38. If projects X and Y are mutually exclusive, which should be accepted?
A) Project X only
B) Project Y only
C) Neither project
D) Both projects
Related questions
Mr Yaqoob is a financial analyst for M/s Sheeraz & Co. The director of capital budgeting has asked Yaqoob to analyze two proposed capital investments, Projects X and Y. Each project has a cost of Rs. 5,000, and the cost of capital for each project is 10 percent. The projects’ expected net cash flows are as follows:
|
|
Expected Net Cash Flows |
|
|
Year |
Project X |
Project Y |
|
0 |
Rs. (5000) |
Rs. (5000) |
|
1 |
3250 |
1750 |
|
2 |
1500 |
1750 |
|
3 |
1500 |
1750 |
|
4 |
500 |
1750 |
- Calculate each project’s payback period, net present value (NPV), and internal rate of return (IRR). [3]
- Which project or projects should be accepted if they are independent? [0.5]
- Which project should be accepted if they are mutually exclusive? [0.5]
d. How might a change in the cost of capital produces a conflict between the NPV and IRR rankings of these two projects?
