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The payback period method of assessing potential investment projects is badly flawed, but it is widely used nonetheless. Why is it so widely used?

Turners Ltd is considering the purchase of a new machine that is expected to save labour on an existing project. The estimated data for the two machines available on the market are as follows: / Which machine will be selected under the following criteria? (a) NPV, assuming a cost of finance of 10 per cent p.a. (b) IRR (c) ARR (d) PBP. Ignore taxation throughout, and treat the savings as if they...

What is the fundamental flaw of using the internal rate of return method? Is it a problem in practice?

What is the key point about the net present value approach to investment decision making that makes it the most correct method, in theory?

Cantelevellers plc’s primary financial objective is to maximise the wealth of its shareholders. The business specialises in the development and assembly of high quality television sets. It normally subcontracts manufacture of the components of each set, carrying out the final assembly itself. Recently the business has developed a new TV set that has been named Flatview, and a decision now needs...

Cool Ltd’s main financial objective is to maximize the wealth of its shareholders. Cool specializes in providing a service for its clients. All of the work that it undertakes is of a similar type for similar clients. Cool’s management is contemplating offering a new service. This will require the acquisition of an item of plant on 1 June 20X4. Cool intends to buy the plant for £300,000,...

When we say that future cash flows should be discounted at a rate that takes account of the opportunity cost of finance, what do we mean by opportunity?

Depreciation is taken into account when deducing profit (in the income statement), but ignored in NPV assessments. If both accounting profit and NPV are meant to be decision-making tools, is this illogical?

How can it be argued that hard capital rationing does not exist in real life?

Is it logical to include interest payments on cash borrowed to finance a project as cash outflows of the project in an NPV assessment? Explain your answer.