21 22 When comparing the payback and discounted payback both methods are biased

21 22 when comparing the payback and discounted

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21)22)When comparing the payback and discounted payback, both methods are biasedtowards liquidity.22)23)When comparing the payback and discounted payback, the discounted payback is moredifficult to compute and thus is not as widely used as the payback method.23)24)For most projects, the average accounting return (AAR) should be less than the IRR.24)25)A disadvantage with the average accounting return is the accounting basis of the valuesused in the computation.25)26)A disadvantage with the average accounting return is the difficulty in obtainingnecessary information to do computation.26)27)A disadvantage with the average accounting return is the exclusion of time value ofmoney considerations.27)2
28)A project is accepted if the target AAR exceeds the project AAR.28)29)AAR is biased in favour of liquid investments.29)30)Average accounting return employs some sort of arbitrary value against which theproject measurement must be compared when determining whether to accept or reject aproject.30)31)In actual practice, managers frequently use the AAR because the information is soreadily available.31)32)Lack of consideration of the time value of money is a weakness of the averageaccounting return method of analysis.32)33)The AAR is based on cash flows and market values.33)34)The average accounting return calculation takes the time value of money into account.34)35)The average accounting return could lead to incorrect decisions when comparingmutually exclusive investments.35)36)If the internal rate of return on a project is 11.24%, and the project is assigned a 9.5%discount rate, then the profitability index will be greater than 1.0.36)37)The payback period and discounted payback are biased in favour of liquid investments.37)38)Two projects that are mutually exclusive are said to be independent.38)39)IRR uses an arbitrary cutoff number in its decision rule.39)40)A firm that only accepts projects for which the IRR is equal to the firm's required returnwill, on average, neither create nor destroy wealth for its shareholders.40)41)Tim is considering two projects, both of which have an initial cost of $12,000 and totalcash inflows of $15,000. The cash inflows of project A are $1,000, $2,000, $4,000, and$8,000 over the next four years, respectively. The cash inflows for project B are $8,000,$4,000, $2,000 and $1,000 over the next four years, respectively. Which one of thefollowing statements is correct if Tim requires a 10 percent rate of return and has arequired discounted payback period of 3 years? Given this information, Tim shouldaccept project A because it has a payback period of 2.65 years.41)3
42)NPV and IRR can lead to different decisions in situations investment decision involvesmutually exclusive choices.42)43)NPV and IRR can lead to different decisions in situations where project cash flow areconventional.

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