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NEW QUESTION: 1
A disadvantage of the net present value method of capital expenditure evaluation is that it:
A. Does not provide the true rate of return on investment.
B. Is difficult to adapt for risk.
C. Is calculated using sensitivity analysis.
D. Is difficult to apply because it uses a trial and error approach.
Answer: A
Explanation:
Choice "b" is correct. The net present value (NPV) method of capital expenditure evaluation does not
provide the true rate of return on investment. The NPV indicates whether or not an investment will earn
the "hurdle rate" used in the NPV calculation. If the NPV is positive, the return on investment will exceed
the hurdle rate. If the NPV is negative, the return on investment will be less than the hurdle rate. If the
NPV is zero, the return on investment will be exactly equal to the hurdle rate. Choice "a" is incorrect.
Sensitivity analysis is a "what if" technique that asks how a given organization will change if the original
estimates used in the capital budgeting model are changed. Choice "c" is incorrect. NPV calculations do
not use a trial and error approach. Choice "d" is incorrect. NPV method is not difficult to adapt for risk. To
adapt for increased risk, a higher hurdle rate is used. To adapt for less risk, a lower hurdle rate is used.
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D. Ring
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Aalk - 2014-05-05 16:45:18
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