PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Question
Chapter 5, Problem 3PS
a)
Summary Introduction
To discuss: Whether
b)
Summary Introduction
To discuss: That in case of the payback period method as long as the minimum payback period is short, the rule makes sure that the company takes no borderline projects and it reduces risk.
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Students have asked these similar questions
Which one of these statements related to discounted payback is correct?
Discounted payback does not require a cutoff point.
O
ооо
The discounted payback period increases as the discount rate decreases.
Payback is a better method of analysis than discounted payback.
Discounted payback is used more frequently in business than payback.
Discounted payback is biased towards short-term projects.
If a firm applies the same discount rate to all projects for all of its divisions, the firm will incorrectly evaluate projects and will also become riskier over time. Explain why this occurs and how it can be prevented.
Which of the following statements is correct regarding the payback method?
Takes account of differences in size among projects.
If a project’s payback is positive, then the project should be accepted because it must have a zero NPV.
Ignores cash flows beyond the payback period.
Has an objective, market-determined benchmark for making decisions.
Directly account for the time value of money.
Chapter 5 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 5 - (IRR) Check the IRRs for project F in Section 5-3.Ch. 5 - (IRR) What is the IRR of a project with the...Ch. 5 - (XIRR) What is the IRR of a project with the...Ch. 5 - Payback a. What is the payback period on each of...Ch. 5 - Payback Consider the following projects: a. If the...Ch. 5 - Prob. 3PSCh. 5 - IRR Write down the equation defining a projects...Ch. 5 - Prob. 5PSCh. 5 - IRR Calculate the IRR (or IRRs) for the following...Ch. 5 - IRR rule You have the chance to participate in a...
Ch. 5 - IRR rule Consider a project with the following...Ch. 5 - IRR rule Consider projects Alpha and Beta: The...Ch. 5 - IRR rule Consider the following two mutually...Ch. 5 - IRR rule Mr. Cyrus Clops, the president of Giant...Ch. 5 - Prob. 12PSCh. 5 - Investment criteria Consider the following two...Ch. 5 - Profitability index Look again at projects D and E...Ch. 5 - Capital rationing Suppose you have the following...Ch. 5 - Prob. 17PSCh. 5 - Prob. 18PS
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- Is this statement ture or false? Requiring a relative short pay-back period for projects indicates a high risk avoiding propensity within the organisationarrow_forward1) What is the company's WACC? 2) Should the company take the projects? Assume that the projects have the same risk as an average project for your firm. 3) If one project is depended on the other in a way that the company can only take both projects, should it take it?arrow_forwardis this statement true or false? and why? Requiring a relative short pay-back period for projects indicates a high-risk avoiding propensity within the organisationarrow_forward
- I asked this question before, but for some reason, even though it was answred I cannot see it, it marks an error when I try to open it. So here it is again: Comparing Investment Criteria. Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule. a. Payback period. b. Internal rate of return. c. Profitability index. d. Net present value. Thank you!arrow_forwardIndicate whether its True or False. Then write the explanation! The twin advantages with using the IRR method as opposed to the NPV method for project evaluation is that you don’t need to worry about what an appropriate risk- adjusted discount rate might be for the project and you will always get the correct answer to the investment decision.arrow_forwardA company that has several very different lines of business should always use only one “beta” to determine its discount rate on projects: true or false?arrow_forward
- The ARR has one specific advantage not possessed by the payback period in that it a.considers the time value of money. b.measures the value added by a project. c.is always an accurate measure of profitability. d.is more widely accepted by financial managers. e.considers the profitability of a project beyond the payback period.arrow_forwardWhich of the following is correct about the security market line (SML)? Investment projects that plot above the security market line have a positive NPV. Investment projects that plot above the security market line have a negative NPV. Investment projects that plot above the security market line have a zero NPV. Investment projects that plot above the security market line have an excessively high discount rate.arrow_forwardYou should accept a project when the ?: net present value is negative. profitability index is positive. payback period exceeds the required period. AAR is greater than the required return. 7. Which one of the following statements is correct? The payback period is also referred to as the benefit-cost ratio. The internal rate of return can be reliably used for all independent projects. The profitability index is used when the investment funds are limited. The net present value should not be used to rank mutually exclusive projects. 8. You should accept a project when the ?: net present value is negative. profitability index is less than 1 but greater than 0. discounted payback period is less than the required period. AAR is less than the required return. 9. The crossover point ? : is used to determine which one of two internal rates of return for a project should be used when determining if a project should be accepted. 2. is the…arrow_forward
- Which of the following statements is true? Multiple Cholce There Is no correlation between net present value and Internal rate of return. A project with a positive net present value will have a discount rate that Is greater than the Internal rate of return. None of the statements are true Glven several projects with positive net present values, the company should choose the project with the hlghest net present value. A project with a positive net present value will have a discount rate that Is less than the Internal rate of return.arrow_forwardI think question 3 is not answered clearly. If Project A is rejected due to negative NPV, then all positive NPVs projects should be accepted. The answer is not clear. Please correct me if I am missing something. Question 3) If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know? Your answer is: No Due to Project A's negative NPV, it cannot cover the initial investment within its useful life. Will it turn down any positive NPV projects? It will reject projects with positive NPVs but not those with negative NPVs. If all potential cash flows are taken into account but the project still doesn't reach the designated cutoff point, the NPV can still be positive.arrow_forwardProjects with _____are preferred. O a. Lower payback period. O b. Normal payback period. O c. Higher payback period. O d. Any payback period.arrow_forward
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