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Questions and Answers
What assumption does NPV make about cash inflows?
What assumption does NPV make about cash inflows?
- Cash inflows are not reinvested
- Cash inflows are reinvested at the cost of capital (correct)
- Cash inflows are reinvested at the project's IRR
- Cash inflows are reinvested at a fixed rate
Why do companies prefer larger cash inflows in the early years?
Why do companies prefer larger cash inflows in the early years?
- Because of the upstream uncertainty
- Because of the lower predictability of early year cash inflows
- Because of the higher cost of capital in later years
- Because of the downstream uncertainty (correct)
What is a major problem that can cause IRR and NPV to rank projects differently?
What is a major problem that can cause IRR and NPV to rank projects differently?
- Differences in project duration
- Differences in the magnitude and timing of the cash inflows (correct)
- Differences in the cost of capital
- Differences in the type of project
Which approach tends to be more conservative?
Which approach tends to be more conservative?
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What is a characteristic of early year cash inflows?
What is a characteristic of early year cash inflows?
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