According to the text, which of the following would NOT be considered a limitati

Question

According to the text, which of the following would NOT be considered a limitation of ratio analysis? A. Window dressing" techniques can make statements and ratios look better. B. Different operating and accounting practices can distort comparisons C. Ratios standardize numbers and facilitate comparisons D. Comparison with industry averages is difficult for a conglomerate firm that operates in many different divisions. According to the text, which one of the following indicators should cause you to accept an independent project with investing type cash flows? A net present value less than zero B. project's internal rate of return less than the required return C. net present value that is greater than the internal rate of return D. project's internal rate of return that exceeds the required return

Explanation / Answer

1. The answer is C.
The others are limitations. C is the only benefit. It is difficult to compare using just the figures in a balance sheet or income statement, since they may be vastly different. Ratio analysis makes intercompany figures or year-on-year figures comparable, thus assisting in providing a well-informed approach to decision making.

2. The answer is D.
The others are detractors. D is the only argument for accepting the project. If the project's IRR is exceeding the required return, that means that the NPV is positive, since the IRR is the point where the NPV of a project equals zero, i.e. the IRR equals the required rate of return.

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