1. If the net present value of project A is +$70, and of project B is...

If the net present value of project A is +$70, and of project B is +$50, then the net present value of the combined project is:

Group of answer choices

+$80

+$140

None of the above

+$60

+$120

+$20

Are there problems with using the payback rule? The following are disadvantages of using the payback rule except:

Group of answer choices

The payback rule does not have the value additive property

The payback rule does not use the time value of money

The payback rule ignores all cash flow after the cutoff date

The payback period is easy to calculate and use

Solutions

Expert Solution

1. The NPV rule has the value additive property

The net present value of the combined project = The net present value of project A + The net present value of project B

The net present value of the combined project = 70 + 50

The net present value of the combined project = +$120

The payback rule does not have the value additive property. Yes, and it is a disadvantage. The NPV rule has the value additive property. Eliminate option A

The payback rule does not use the time value of money. Yes, payback rule ignores time value of money and it is a disadvantage as compared to the NPV rule, which uses time value of money. Eliminate option B

The payback rule ignores all cash flow after the cutoff date. Yes, the cash flows beyond the cutoff date are not at all considered and it is a disadvantage. In NPV all the cash flows are considered. Eliminate option C

So, option D is correct

The payback period is easy to calculate and use. It is an advantage and it is the main reason payback rule is used.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

You are using a net present value profile to compare Project A and B, which are...

You are using a net present value profile to compare Project A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? A.The internal rate of return of each project is equal to zero. B.The net present values for both projects are the same at a certain discount rate C. The net present value of each project is equal to zero D. The internal rate of return for Project...

NET PRESENT VALUE Simon company is considering two investments, Project A an Project B. They require...

NET PRESENT VALUE Simon company is considering two investments, Project A an Project B. They require a 9% return from investments. The initial investment for project A is $250,000. The initial investment for project B is $525,000. The expected cash flows from each project are below. a. Compute the NPV (Net Present Value) for each project. b. Compute the profitability index for for each project. c. Which project do you recommend? Year Project A Project B 1 115,000 170,000 2...

true or false 1.For a normal, or conventional, project, the net present value of a project...

true or false 1.For a normal, or conventional, project, the net present value of a project is positive when the required rate of the project is higher than the internal rate of return of the project. 2.Despite the easiness of calculating, payback period is not commonly used in small businesses. 3.The cash flow from old equipment that is replaced by new equipment is included in the capital budgeting calculation of cash flows from the new equipment project.

1. a) What is the net present value of a project that has upfront costs of...

1. a) What is the net present value of a project that has upfront costs of $5 million and pays end of the year cash flows of $1 million in one year, $2 million in two years, and $3 million in three years if the annual discount rate for the project is 3 percent? Show how much money you would have at the end of three years if you bought the project and what you would have instead if you...

Imagine that the net present value of a hydroelectric plant with a life of 70 years...

Imagine that the net present value of a hydroelectric plant with a life of 70 years is $23.73 million and that the net present value of a thermal electric plant with a life of 35 years is $18.77 million. Rolling the thermal plant over twice to match the life of the hydroelectric plant thus has a net present value of ($18.77 million) + ($18.77 million)/(1 + 0.05)35 = $22.17 million. Now assume that at the end of the first...

1. What is the net present value (NPV) of the project? 2. Based on this NPV,...

1. What is the net present value (NPV) of the project? 2. Based on this NPV, should Hasbro undertake this project? 3. What is the internal rate of return (IRR) of this project? You can find IRR by varying the discount rate in your table until NPV is zero. That new discount rate will be the IRR. Your grade will be based on the completeness of your cash flow table and calculations as well as your answers above. Monopoly expansion...

1. What is the net present value (NPV) of the project? 2. Based on this NPV,...

When a project entails significant social costs, the private net present value—the value of the project...

When a project entails significant social costs, the private net present value—the value of the project to its sponsor—exceeds the true (societal) net present value, namely the combined value to all the affected constituencies inclusive of the social costs. Should the externalities be taken into account when evaluating such a project? In your response, identify stakeholders’ roles, legalities, guidelines, policies or processes that might be considered/required to ensure a sponsor’s compliance or curb undesirable behavior? (See Finnerty Chapter 6) initial...

Net Present Value—Unequal Lives Project 1 requires an original investment of $78,300. The project will yield...

Net Present Value—Unequal Lives Project 1 requires an original investment of $78,300. The project will yield cash flows of $14,000 per year for nine years. Project 2 has a calculated net present value of $18,100 over a seven-year life. Project 1 could be sold at the end of seven years for a price of $51,000. Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below. Present...

Net Present Value—Unequal Lives Project 1 requires an original investment of $72,800. The project will yield...

Net Present Value—Unequal Lives Project 1 requires an original investment of $72,800. The project will yield cash flows of $17,000 per year for six years. Project 2 has a calculated net present value of $15,900 over a four-year life. Project 1 could be sold at the end of four years for a price of $62,000. Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below. Present...

Subjects