8. Which of the following statements is CORRECT? a. An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. b An example of an externality is a situation where a bank opens a new office, and that . new office causes deposits in the bank's other offices to decline. C. The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
8. Which of the following statements is CORRECT? a. An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. b An example of an externality is a situation where a bank opens a new office, and that . new office causes deposits in the bank's other offices to decline. C. The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:8. Which of the following statements is CORRECT?
a. An externality is a situation where a project would have an adverse effect on some other
part of the firm's overall operations. If the project would have a favorable effect on
other operations, then this is not an externality.
b An example of an externality is a situation where a bank opens a new office, and that
. new office causes deposits in the bank's other offices to decline.
C. The NPV method automatically deals correctly with externalities, even if the
externalities are not specifically identified, but the IRR method does not. This is another
reason to favor the NPV.
d Both the NPV and IRR methods deal correctly with externalities, even if the
· externalities are not specifically identified. However, the payback method does not.
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