10-3 Explain why the NVP of a relatively long-term project, defined as one for w

Question

10-3 Explain why the NVP 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 NVP of short term project.
10-4 When two mutually exclusive projects are being compared, explain why the short term project might be higher ranked under NPV criterion if the cost of capital is high whereas the long term project might be deemed better if the cost of capital is low. Would changes in the cost of capital ever cause a change in the IRR ranking of two such projects?
11-8 Most firms generate cash inflows every day, not just once at the end of the year. In capital budgeting, should we recognize this fact by estimation daily project cash flows and then using them in the analysis? If we do not, will this bias our results? If it does, would the NVP be biased up or down? Explain.
11-9 What are some differences in the analysis for a replacement project versus that for a new expansion project?

Explanation / Answer

4) The differences between expansion projects and replacement projects are:

· Expansion projects are the projects in which the firm makes the incremental investment. This investment may be related to diversification of business or unrelated to diversification. The objective of replacement project is to improve operating efficiency and reduce cost. For example replacement of semiautomatic machine with fully automatic machine.

· Expansion projects entail incremental cost and revenue, but in replacement decision incremental cost and revenue are not so apparent.

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