Chrome File Edit View History Bookmarks People WindowHelp Quiz 2 Secure https//m

Question

Chrome File Edit View History Bookmarks People WindowHelp Quiz 2 Secure https//moodle.adelphi. tempt :526907 Question 13 Not yet answered Points out of 1.00 P Flag question Which one of the following is most closely related to the net present value profile? Select one aPayback b. Proftability index C.Average accounting returm O d.lmem al rate of return ODisoounted payback Question 14 Not yet answered Points out ofl 1.00 P Flag question Which one of the following statements is correct? Assume cash flows are conventional Select one a.tfthe IRR exceeds the required returm, tho prontabily index--beloss than 1.?. b.When the internal rabe of neturm is greater than the required return, he net present value is positive ? Oc. If two projects are mutualy exclusive, you shouid select the project with the shortest payback period d.Projects with conventional cash fows have multple intermal rates of return e. The profitablity index will be greater than 1.0 when the net present value is negetive Question 15 Not yet answre Points out of 1.00 Which one of the following methods of analysis is most appropriate to use when two investments are mutually Select one: 4 5

Explanation / Answer

1. Method closely related to NPV profile is Profitability Index Method. Correct option is (b)

Pay back period method does not consider time value of money. It simply states the minimum time required to recover the investment in the project. It has no relationship with NPV method.

Average accounting return method measures the profitability of the project. It expreses the average profits earned as a percentage of investment in the project. Like pay back perod, it does not consider time value of money. It also has no relationship with NPV method.

Internal rate of return method considers time value of money. For calculating IRR of a project, NPV of the project is needed. But the results provided by the NPV method and IRR method may not be the same always.

Discounted payback period method considers time value of money. For calculating the pay back period of a project under discounted pay back period method, cash flows are discounted at the appropriate discount rate. The results provided by the NPV method and the Discounted payback period method may be different.

Profitablity Index method is a variation of NPV method. For calculating NPV of a project, present value of cash outflows is subtracted from the present value of cash inflows and to calculate Profitability Index, present value of cash inflows is divided by present value of cash outflows. Generally, the results provided by the NPV method and the Profitability method are same. If a project has positive NPV, then its profitability index would be more than 1.  If a project has negative NPV, then its profitability index would be less than 1.

Hence, the results of NPV method and Profitabilty method are generally same. Hence the most closely related method to NPV is Profitabilty method.

correct option (b)

2. The correct option is (c)

The statement " If two projects are mutually exclusive, you should select the project with shortest payback period" is true. Mutually exclusive projects are those where acceptance of one project means rejection of other project. Project with a shorter payback period is considered to be less riskier as compared to the project with higher payback period. Shorter payback period means money invested in the project is recovered in a shorter time period. Hence, if a decision is to be made on the basis of payback perod, then the project with the shortest time period should be selected.

"The profitability index will be greater than 1 when NPV is negative." This statement is false since when NPV is negative, profitablity index will be less than 1.

"Projects with conventional cash flows have multiple internal rate of return". ThIs statement is false since such projects have single internal rate of return.

"When the internal rate of return is greater than the required return, the NPV is positive" . This statement is false since even when internal rate of return is greater than the required return, still NPV may be negatiive.

"If the internal rate of return exceeds required retuen, profitability index will be less than 1". This statement is false since even if IRR exceeds required return, profitability index may be more than 1

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.