For projects with cash outflows up front and cash inflows later on, ignoring the time value of money would lead companies to understate the value of investment projects and therefore decline to make investments that they should in fact pursue. True False
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- Is a negative free cash flow (FCF) always a bad sign? A negative free cash flow means that the company does not have sufficient internal funds to finance investments in fixed assets and working capital. Is there a scenario where a negative free cash flow is not a bad sign for the company?A disadvantage of using the payback period to compare investment alternatives is that it a. Ignores cash flows beyond the payback period. b. Cannot be used to compare alternatives with different initial investments. c. Cannot be used when cash flows are not uniform. d. Involves the time value of money. e. Cannot be used if a company records depreciation.A. it is very A disadvantage of the average rate of return method of capital investment analysis is that complex to compute B. it does not include the entire amount of income earned over the life of a project C. it does not emphasize accounting income, which is often used by investors and creditors in evaluating management performance D. it does not directly consider the timing of the expected cash flows
- Which of the following are significant flaws with the Payback Period Method? (Select all that apply) A. Biased against long-term projects B. Uses an arbitrary benchmark C. Very rarely used in practice D. Uses accounting profits rather than cash flows E. Ignores Time Value of MoneyIf a firm must forgo a cash flow, not leasing an owned building for example, in order to accept some investment project, are the lost cash flows included in the analysis?If an investment project will positively affect the cash flows of other products the firm currently sells (increasing the flows), this is cannibalization and therefore should be counted in the investment project’s expected cash flows. tRUE OR FALSE
- Which of the following statements is false? A. Net incomes are not cash flows. Financial Managers should focus on the cash flows when making capital budgeting decisions. B. Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision. C. To the extend that overhead costs are fixed and will be incurred in any case, they are not incremental to the project and should be excluded in the capital budgeting analysis. D. Depreciation is not a cash expense paid by the firm. E. None of the above.Companies with low cash flow may be unable to bear the risk of a large project. why?1. Which of the following statements most appropriately describe how agency cost affect the firms choice structure? Explain. a. When firm owners borrow money they have an incentive to engage in excessive risk taking (that is investing in very risky projects). Since they are managing someone else money.b. When firm have very limited investment opportunities and little debt financing combine with wealth profit that provide them with free cash flow, their management team might squander the firms' earnings on questionable investments. 2. What is the primary weakness of using EBIT-EPS analysis as a financing tool. 3. Why might firms who's sale level change drastically overtime, choose to use debt only sparingly in their capital structure 4. What does the term independence hypothesis means as it applies to capital structure theory 5. Explain how industry norms might be used by the finance manager in the design of the company's financing mix note: if you can provide the source of the info,…
- Would it be possible for a company to report negative free cash flow and still be highlyvalued by investors; that is, could a negative free cash flow ever be viewed optimisticallyby investors? Explain your answer.Which of the following is a disadvantage of the IRR project evaluation method? Select one: a. It does not take into account the time value of money. b. If there are negative cash flows after positive cash flows, there may be zero or multiple internal rates of return. c. It does not make adequate allowance for risk. d. It focuses on accounting profit rather than cash flow as the source of value.Identify the incorrect statement in connection to working capital management: A. Conservative financing policies use short-term funds to finance only part of fluctuating current assets. B. Long-term funds are more expensive and more risky than short-term funds . C. The objectives of working capital management are profitability and liquidity. D. Permanent current assets should be financed from long-term sources if a moderate policy is adopted.