COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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it can be used as a rough screening device to eliminate those projects whose returns do not materialize until later years.
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all positive NPVs will increase the value of the firm
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it allows comparison of benefits and costs in a logical manner
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it recognizes the timing of benefits resulting from the project
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Detailed explanation-1: -The answer is A). The NPV is not used as a rough screening deice to eliminate projects whose returns do not materialized until later years. Simple payback period does. The simple payback period is the number of years until a project generates enough cumulative cash flows to cover the initial cost.
Detailed explanation-2: -Answer and Explanation: All of the following are advantages of NPV except: C. it recognizes the timing of the benefits resulting from the project. This is not an advantage of NPV due to the fact that NPV results in a single valuation of the project but does not give any feedback as to when the cashflows will come in.
Detailed explanation-3: -NPV can be very useful for analyzing an investment in a company or a new project within a company. NPV considers all projected cash inflows and outflows and employs a concept known as the time value of money to determine whether a particular investment is likely to generate gains or losses.
Detailed explanation-4: -The NPV calculation helps investors decide how much they would be willing to pay today for a stream of cash flows in the future. One disadvantage of using NPV is that it can be challenging to accurately arrive at a discount rate that represents the investment’s true risk premium.