COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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If the project has a profitability index less than zero.
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If two or more projects are mutually inclusive.
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If the firm is limited in the capital it has available (capital rationing).
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If a project has more than one sign reversal.
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Detailed explanation-1: -Under what condition would you not accept a project that has a positive net present value? If the firm is limited in the capital it has available (capital rationing).
Detailed explanation-2: -Since NPV can only be positive, negative, or zero, the NPV decision rule is pretty straightforward. An independent standalone project should be accepted if the NPV is positive, rejected if the NPV is negative, and can be either accepted or rejected if the NPV is zero.
Detailed explanation-3: -Net Present Value is the sum of the investment’s expected cash inflows and outflows discounted back to their present value at a risk adjusted rate. If the NPV is greater than $0, the project is accepted. Otherwise the project is rejected.
Detailed explanation-4: -For example, a company with significant debt issues may abandon or postpone undertaking a project with a positive NPV. The company may take the opposite direction as it redirects capital to resolve an immediately pressing debt issue. Poor corporate governance can also cause a company to ignore or miscalculate NPV.