Which of the following statements is most accurate? A) For mutually exclusive projects, the decision rule is to pick the project that has the highest net present value (NPV). B) If the change in current liabilities is greater than the change in current assets, it means that additional financing was needed and there is a cash outflow. C) Replacement decisions involve mutually exclusive projects. D) An analyst can ignore inflation since price level expectations are built into the weighted average cost of capital (WACC).
seems too easy but A…
not “a”, what if you have unequal lives?? I will agree with maratikus, “c”
exactly, cfano1. it’s not NPV but annuity equivalent or whatever it’s called that should be compared.
C is the correct answer. I fell for A, the wording seems right!!!
Yeah, but alot of replacement decisions don’t involve ME projects, I’m going A and am gonna raise starbucks hell if it’s C
FYI Your answer: A was incorrect. The correct answer was C) Replacement decisions involve mutually exclusive projects. Because replacement decisions involve either keeping the old asset or replacing the old asset, the projects are mutually exclusive. The decision rule for NPV is to pick the project with the highest positive NPV. Only projects with positive NPV add to the company’s value. If neither project has a positive NPV, neither project should be chosen. The statement about net working capital (NWC) is stated in the reverse of how we usually think of it: D in NWC = DCurrent Assets − DCurrent Liabilities. Here, the change in current liabilities exceeds the change in current assets and the result is negative, meaning the project frees up cash, creating a cash inflow. Because the WACC is adjusted for inflation, the analyst must adjust project cash flows upward to reflect inflation. If the cash flows are not adjusted for inflation, the NPV will be biased downward. (Reverse the preceding logic for deflation.)
HIGHEST POSITIVE NPV…