Question

Question 8A firm may choose a project with a rapid payback period rather than one with a larger net present value. Discuss the validity of this statement. (2points)

Question 9The internal rate of return represents the rate of interest that recovers the initial investment outlay.Discuss the validity of this statement. (3points)

Question 10In the face of the global financial crisis, Kevin Rudd introduced government guarantees on deposits. Discuss covering at least the following two parts:

1.An introduction/summary of the Government Guarantee.

2.Thegeneralimpact of this policy to the efficient frontier based on the Australian environment.

Answer 1

8]

This statement could be valid in certain cases.

Usually, firms choose projects with the higher NPV because a higher NPV increases the value of the firm. A higher NPV generates more value for investors because NPV directly measures the value created in dollar terms.

However, there may be certain cases where a firm prefers a lower payback period than a higher NPV. For example :

• The project is in a foreign country with risk of expropriation.
• The predictability of cash flows are highly uncertain in the later years of the project.
• Recovery of capital is more important than value creation

In such cases, the firm may choose a project with a faster payback than a larger NPV

9]

This statement is valid.

IRR is the discount rate at which NPV is zero. NPV is zero when the present value of cash inflows equals the initial investment. Therefore, IRR represents the rate of interest that recovers the initial investment outlay on a discounted cash flow basis