Describe three of the six decision models used in capital budgeting decision-making and briefly evaluate their effectiveness
What will be an ideal response?
Answer:
Payback Period is simple and fast but economically unsound. It ignores all cash flow after the cutoff date and it ignores the time value of money.
Discounted Payback Period incorporates the time value of money but still ignores cash flow after the cutoff date.
Net Present Value is economically sound and properly ranks projects across various sizes, time horizons, and levels of risk, without exception for all independent projects.
IRR provides a single measure (return) but has the potential for errors in ranking projects. It also can lead to incorrect selection of two mutually exclusive projects or incorrect acceptance or rejection of a project with more than a single IRR.
Modified Internal Rate of Return, in general, corrects for most of, but not all, the problems of IRR and gives the solution in terms of a return.
Profitability Index incorporates risk and return, but the benefits-to-cost ratio is actually just another way of expressing the NPV.
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The _______________________________ principle suggests that management should structure the firm around the work it performs rather than around individuals with unique skills
Fill in the blank(s) with correct word
Extraordinary items are always presented gross of applicable income taxes
Indicate whether the statement is true or false
Preferred stock is considered the residual equity of a corporation
Indicate whether the statement is true or false
David and Veronica Allen bought land in Independence, Missouri, during 1994 for $22,000. In January 1998, they listed it for sale with a broker, Chuck Zuvers, asking $88,000. The property remained on the market until May 1999, when Thomas C. Scott contracted to buy it for $90,000. Scott signed the sales contract as "Thomas C. Scott, or assigns" because he was organizing Scott, Hewitt & Mize as a
limited liability company and wanted the land deeded to the firm. At closing, and following Scott's instruction, the Allens deeded the property to "Scott, Hewitt & Mize, LLC." Although Scott and his partners had filed articles of organization for Scott, Hewitt & Mize with the Secretary of State before closing, the Secretary of State rejected the articles because of errors contained in them. Scott corrected the errors, and the Secretary of State issued a certificate of organization to Scott, Hewitt & Mize nine days after closing. ?The contract between the Allens and Thomas C. Scott: A)?Is invalid because the LLC was not formed. B)?Is valid because the contract is with "Thomas C. Scott or assigns". C)?Is invalid because Thomas C. Scott cannot assign a personal right such as this to another party. D)?Is voidable by the Allens.