10-2 What types of projects required the least detailed and the most detailed an
ID: 2650512 • Letter: 1
Question
10-2 What types of projects required the least detailed and the most detailed analysis in the capital budgeting process?
10-3 Explain why the NPV of a relatively long-term project, defined as one for which a high percentage of its cash flows are expected in the distant future, is more sensitive to changes in the cost of capital than is the NPV of a short-term project.
10-5 Suppose a firm is considering two mutually exclusive projects. One has a life of 6 years and the other a life of 10 years. Would the failure to employ some type of replacement chain analysis bias an NPV analysis against one of the projects? Explain.
Explanation / Answer
10-2 Solution-
In the capital budgeting process the project have more (greater) risk or projects requiring more (greater) investments have to given analysis on the capital budgeting process.
10-3 Solution-
The Net present value (NPV) is calculate by the discounting process actually compounds the interest rate over time and the discounting future cash flows. So, any increse in discount rate has a greater impact on cash flow in year 5 than the cash flow in year 1.
10-5 Solution-
Yes, the bias exist in the net present value (NPV) analysis against the 1 (one) of the project, if the firm considering 2 (two) mutually exclusive project and a firm fails to occupy replacement chain analysis. Suppose a project that has a life of ten (10) years has more cash flow coming in early years and project has life of 15 years has more cash flows coming in later years than Net present value analysis accept or favors the project with maturity period of ten (10) years but in reality project that has maturity period of 15 year could be better.
So, if the firm is analyze 2 (two) mutually exclusive project with different maturity time period then firm have to see true aspect of net present value of both the project with the help of employ replacement chain analysis.
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