TRUE OR FALSE ? 1- When independent projects are evaluated, no incremental analysis is necessary between...

TRUE OR FALSE ?

1- When independent projects are evaluated, no incremental analysis is necessary between projects

2- In annual worth method, it is not necessary to use the Least Common Multiple (LCM) of lives to satisfy the equal-service requirement

3- The rate of return is the interest rate that makes the present worth or annual worth of a cash flow series exactly equal to 0

4- Mutually exclusive alternatives are evaluated one at a time and compete only with the DN project

5- The annual worth method is considered best to use compared to present worth, future worth, and rate of return

Expert Solution

Solution:

The problem asked is on annual worth analysis in the capital budgeting decisions.

1. True, In the independent projects decisions are based upon positive present worth of the project. If the present worth of project is in positive, the project is selected. No incremental analysis is carried out as done in mutually exclusive projects. More than one project is selected or the DO Nothing strategy is adopted.

2. True, In the annual net worth method no use of LCM method is done even for the unequal service periods of the projects.Under this method the analysis is done only for the one life cycle of the projects. The need of lease common multiple is done away with.

3. False, The Internal rate of return is the rate which equates the future cash flows with the present cash outflows of the project but not the simple "rate of return". Had the word be "Internal" the statement would have been true.

jeff jeffy answered 1 year ago

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