Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true?
A. It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).
B. It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV).
C. The firm will accept too many projects in all economic states because a 4-year payback is too low.
D. The firm will accept too few projects in all economic states because a 4-year payback is too high.
E. If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak.
Answer: E
You might also like to view...
Answer the following statements true (T) or false (F)
1. Computer software programs are used to solve layout problems as they guarantee optimal solutions. 2. ABC analysis is a tool for analyzing and designing processes. 3. A route sheet is an excellent communication tool because it shows the profit margin on the order. 4. A hexagon is one of the symbols usually used in a process chart. 5. A process chart shows costs and points of indifference.
Which of the following statements is CORRECT?
A. Two firms with the same expected free cash flows and growth rates must also have the same value of operations. B. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. C. If a company has a weighted average cost of capital WACC = 12%, and if its free cash flows are expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. D. The value of operations is the present value of all expected future free cash flows, discounted at the free cash flow growth rate. E. The constant growth model takes into consideration the capital gains investors expect to earn on a stock.
Achieving total quality requires ______.
a. the commitment of the organization’s management and employees b. the involvement of the United Nations c. the involvement of the ISO d. the involvement of the U.S. Senate
Which of the following statements is true of the accord that will be supervised by the World Trade Organization (WTO)?
A) It promotes the practice of requiring high local content of materials for manufactured products, such as cars. B) It addresses a "social dimension" through the establishment of uniform labor and Social Security regulations. C) It does not allow any internal tariffs among the member states. D) It prohibits member countries from placing limits on the quantity of imports.