BUISENESS MANAGEMENT
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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It relies on discounted cash flows
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It’s expressed as a percentage for easier comparison
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Its value will fall if interest rates rise
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A financially viable investment has a positive value
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Detailed explanation-1: -The NPV method is not applicable when comparing projects that have differing investment amounts. A larger project that requires more money should have a higher NPV, but that doesn’t necessarily make it a better investment, compared to a smaller project. Frequently, a company has other qualitative factors to consider.
Detailed explanation-2: -Indirect cash flows caused by a capital budgeting project are not relevant to the project investment decision.
Detailed explanation-3: -Disadvantages of NPV 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. In addition, the NPV method is not useful for comparing two projects of different size.
Detailed explanation-4: -NPV ignores sunk costs. Answer.