Which of the following represents a SHORTCOMING of the net present value rule of capital budgeting? Question 18 options: It fails to measure the change in wealth from undertaking a project. It fails to incorporate time value of money. It fails to consider the impacts of depreciation on cash flows. It fails to consider new information once the project is underway. It cannot be used in a sensitivity analysis.
Added by Marina M.
Step 1
** Show more…
Show all steps
Your feedback will help us improve your experience
Sri K and 87 other Principles of Accounting educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Recommended Videos
1. Which of the following element/s should be considered when evaluating capital budgeting decision rules? A. Time value of money B. Adjustment for risk C. Creating value for the firm D. All of the above 2. Which of the following statement is NOT true about Net Present Value decision rule? A. If the NPV is negative, reject the project B. A positive NPV means the project will increase the wealth of the owners C. If there is a conflict result between NPV and IRR, always follow IRR D. NPV rule take into consideration of the time value of money 3. The ________ measures the time to get the initial cost back. A. Internal Rate of Return B. Net Present Value C. Payback period D. Profitability Index 4. What is/are the advantage/s of Payback method? A. Easy to understand B. No adjustment for uncertainty of later cash flows C. Ignores the time value of money D. Biased again short-term project 5. The main difference between Payback and Discounted Payback is: A. Discounted Payback accounts for the time value of money and Payback does not B. Discounted Payback accounts for the risk of the cash flows and Payback does not C. Only Payback does not provide an indication about the increase in value D. Both A and B
Sri K.
The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Cute Camel Woodcraft Company is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 $425,000 Year 3 $500,000 Year 4 $500,000 The company’s weighted average cost of capital is 9%, and project Beta has the same risk as the firm’s average project. Based on the cash flows, what is project Beta’s NPV? -$1,897,057 $1,419,119 -$1,580,881 -$1,080,881 Making the accept or reject decision Cute Camel Woodcraft Company’s decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should ___________ project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects—project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don’t need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker’s statement? A) No, the NPV calculation will take into account not only the projects’ cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows. B) Yes, project A will always have the largest NPV, because its cash inflows are greater than project B’s cash inflows. C) No, the NPV calculation is based on percentage returns, so the size of a project’s cash flows does not affect a project’s NPV.
Adi S.
The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Lumbering Ox Truckmakers is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,750,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $275,000 Year 2 $450,000 Year 3 $475,000 Year 4 $475,000 Lumbering Ox Truckmakers’s weighted average cost of capital is 10%, and project Beta has the same risk as the firm’s average project. Based on the cash flows, what is project Beta’s NPV? -$1,171,793 $1,303,207 -$1,446,793 -$971,793 Making the accept or reject decision Lumbering Ox Truckmakers’s decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should ______ (Accept or Reject) project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects—project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don’t need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker’s statement? * No, the NPV calculation will take into account not only the projects’ cash inflows but also the timing of cash inflows and outflows. Consequently, project B could have a larger NPV than project A, even though project A has larger cash inflows. * No, the NPV calculation is based on percentage returns, so the size of a project’s cash flows does not affect a project’s NPV. * Yes, project A will always have the largest NPV, because its cash inflows are greater than project B’s cash inflows.
Recommended Textbooks
Horngren’s Cost Accounting
Cost Accounting A Managerial Emphasis
Principles of Accounting Volume 1: Financial Accounting
Transcript
18,000,000+
Students on Numerade
Trusted by students at 8,000+ universities
Watch the video solution with this free unlock.
EMAIL
PASSWORD