Question

True or False:

28. A weakness of NPV is that intermittent cash flows are reinvested at the IRR.

29. A weakness of the payback period is that its too difficult.

30. The preferred approach for calculating cost of debt is the FITA approach.

31. Cost of debt and cost of preferred stock are the only WACC members that are adjusted for taxes.

33. Cannibalization is an example of opportunity cost.

34. Timing of projects does not impact the project's net present value.

35. Financing costs must be included in a project's after-tax cash flows.

36. Flotation costs are generally reflected in a project's after tax cash flows.

37. Profitability index is another way to look at NPV.

39.IRR's weakness include multiple IRRs

Answer 1

28) False

This is not the weakness of the NPV method, NPV method discounts the cash flows. IRR assumes that the cash flows are being reinvested at IRR.

29) False

Payback method is quite easy to calculate, its weakness lies in the fact that it ignores the future cashflows after the capital is recovered.

30) False

The preferred approach to calculate the cost of debt is to calculate its Yield to maturity.

31) False

Cost of preferred stock is not adjusted for taxes. Preferred dividend are not tax deductible.

33) True

Cannibalization is negative effect of new product of the company on the existing product of the company. It is a type of loss to the company and is normally considered in evaluation of project.

34) False

Timing of cash flows can significantly affect the project net present value. The present value of cash flow occurring in later years would be far less than if it is occurring in early years.