Select all the correct answers: A) One weakness of the regular payback method is that it...

Select all the correct answers:

A) One weakness of the regular payback method is that it ignores what happens after the initial cost is recovered. The discounted payback method resolves this issue

B) The crossover rate is the cost of capital in which two projects have the same NPV

C) A firm has a WACC of 15%. A project requires an initial cash flow of $5,000, then it will pay $1,000 for 10 years. The discounted payback of this project is smaller than its regular payback

D) If the crossover rate is 15% and at a WACC of 10% project A has higher NPV than project B, at a WACC of 20% project A will have a lower NPV of project B

Solutions

Expert Solution

A) Wrong

Because, both regular pay back and discounted pay back period ignores what happens after the initial cost is recovered

B) Correct

The Crossover rate is at which both the projects have same NPV

C) Wrong

Discounted pay back period is calculated using the present values of future cash flows,since the present value of a future cash flow will be less than the future cash flow, the discounted pay back period can never be less than regular pay back period.

D) Correct

Cross over rate is the point where the NPVs of two projects will be same and before that NPV of the project 1 will be higher than project 2 and after that NPV of project 2 will be higher than project 1

Since the cross over rate is 15% here, and at WACC=10% which is less than cross over rate, NPV of A is higher,after the the cross over rate i.e after 15% NPV of B will be higher and A will be lower

So, the correct answers are B and D

jeff jeffy answered 1 year ago

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