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 long-term projects and reject too many short-term projects (as judged by the NPV).
B. The firm will accept too many projects in all economic states because a 4-year payback is too low.
C. The firm will accept too few projects in all economic states because a 4-year payback is too high.
D. 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.
E. It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).
Answer: D
You might also like to view...
Which term refers to a deduction from list price applied to a customer's total purchases made during a specific period?
A. Cumulative quantity discount B. Noncumulative quantity discount C. Cash discount D. Quantity discount
Calculate the total volume of units produced if there is a market demand of 50,000 units at a market share of 10%
A) 292,560 B) 440,650 C) 500,000 D) 325,000 E) 100,000
Strategic planning is not a substitute for ______.
A. leadership B. consulting C. accountability D. organizational meetings
Goal conflict can be avoided if budget goals are carefully designed for consistency across all areas of the organization
Indicate whether the statement is true or false