THE TIME VALUE OF MONEY & INVESTMENT ANALYSIS

Choose the incorrect statement

• Capital budgeting goal is to accept a project which maximizes the shareholder wealth

• Capital budgeting is based on forecasting

• Payback period is the number of years needed to recover your initial investment

• Capital budegeting involves identifying, analyzing and selecting projects whose returns are expected within a year

The (a)   method can correct this shortcoming of the payback method that does not consider the time value of money

If there is a conflict between the decisions based on NPV and IRR methods, which method will be best for project evaluation?

• NPV

• IRR

Classification of Projects

(a)   - accept ONE project only

Select the disadvantages of payback period

• It does not consider the time value of money

• It does not consider the cash flows beyond the payback period

• It does not consider the cash initial outlay beyond the payback period

• It does not consider the time taken to recover back initial investment

Choose the following evaluation method that considers time value of money

• Payback period

• Net present value

• Internal rate of return

• Profitability Index

By using IRR, we assumes that cash flows are reinvested at ________.

• the lower of the firm’s discount rate

• an average of the internal rate of return and the discount rate

• the internal rate of return

• the firm’s discount rate

The conflict of decision may arises if ________ or _________

• there is difference in sizes of the projects

• there is difference in discount rate use

• there is difference in the time value of money

• there is difference in the timing of cash flows

NPV assumes cash flows are reinvested at the (a)  

The _________ is the ratio of initial outlay to the present value of Inflows

• Profitability Index

• Net Present Value

• Internal Rate of Return

• Payback Period