Question

Part A) Two projects are mutually exclusive if the cash flows of one are unaffected by the acceptance of the other, but independent if the cash flows of one can be adversely impacted by the acceptance of the other.

True

False

Part B)

Which of the following statements is correct?

		Capital rationing occurs when a company chooses to fund all positive NPV projects.
		A company typically sets no limit on the total amount of capital expenditures that it will make in the upcoming year.
		A decreasing marginal cost of capital can occur when there is not enough internally generated cash for a firm to fund all of its positive NPV projects.
		The Equivalent Annual Annuity method is used to find the equivalent annual annuity for two projects with unequal lives.

Answer 1

PART 1-

The above statement is FALSE

Two projects will be Independent if the cash flows of one are unaffected by the acceptance of the other, but mutually exclusive if the cash flows of one can be adversely impacted by the acceptance of the other.

PART 2-

Only statement (D) i.e The Equivalent Annual Annuity method is used to find the equivalent annual annuity for two projects with unequal lives is correct.

Other options are incorrect, because-

• Under capital rationing, company will choose to fund only those projects with highest NPV
• A company always sets the limits of its upcoming capital expenditures.
• A decreasing marginal cost of capital is the result of enough funds generated by the company internally, so that it don't have to depend on external borrowings to finance its projects.

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