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Manal Elkhoshkhany
Manal Elkhoshkhany, Tutor
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For Businesstutor: Question 13 Which of the following

Resolved Question:

For Businesstutor:
Question 13




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.
Answer







A project’s NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV.








The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.








If a project’s NPV is greater than zero, then its IRR must be less than the WACC.








If a project’s NPV is greater than zero, then its IRR must be less than zero.








The NPVs of relatively risky projects should be found using relatively low WACCs.

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2 points


Question 14




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.
Answer







The longer a project’s payback period, the more desirable the project is normally considered to be by this criterion.








One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.








If a project’s payback is positive, then the project should be rejected because it must have a negative NPV.








The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.








If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time.
Submitted: 4 years ago.
Category: Finance
Expert:  Manal Elkhoshkhany replied 4 years ago.

13)

 

The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.

14)

 

One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.

Manal Elkhoshkhany, Tutor
Category: Finance
Satisfied Customers: 9775
Experience: More than 5000 online tutoring sessions.
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