COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Requires estimate of cost of capital
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Expressed in terms of dollars, not as a percentage
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May not include managerial options embedded in the project
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Considers the time value of money
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Detailed explanation-1: -The biggest disadvantage to the net present value method is that it requires some guesswork about the firm’s cost of capital. Assuming a cost of capital that is too low will result in making suboptimal investments. Assuming a cost of capital that is too high will result in forgoing too many good investments.
Detailed explanation-2: -The main disadvantage of the NPV method is the need for detailed, long-term forecasts of free cash flows generated by prospective projects. the ratio of the present value of the future free cash flows to the initial investment. is analogous to the concept of the yield to maturity for bonds.
Detailed explanation-3: -26. Which of the following is a limitation of the net present value (NPV) method over the internal rate of return (IRR) method of capital budgeting? The net present value (NPV) method contains no information about the amount of capital at risk.