Question
In: Finance
1. If the net present value of project A is +$70, and of project B is...
1.
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
2.
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
2.
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.
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