Project A has an IRR of 15 percent. Project B has an IRR of 18 percent. Both projects have the same risk. Which of the following statements is most correct? a. If the WACC is 10 percent, both projects will have a positive NPV, and the NPV of Project B will exceed the NPV of Project A. b. If the WACC is 15 percent, the NPV of Project B will exceed the NPV of Project A. c. If the WACC is less than 18 percent, Project B will always have a shorter payback than Project A. d. If the WACC is greater than 18 percent, Project B will always have a shorter payback than Project A. e. If the WACC increases, the IRR of both projects will decline.
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
![Project A has an IRR of 15 percent. Project B has an IRR of 18 percent. Both projects have
the same risk. Which of the following statements is most correct?
a. If the WACC is 10 percent, both projects will have a positive NPV, and
the NPV of Project B will exceed the NPV of Project A.
b.
If the WACC is 15 percent, the NPV of Project B will exceed the NPV
of Project A.
c.
If the WACC is less than 18 percent, Project B will always have a
shorter payback than Project A.
d.
If the WACC is greater than 18 percent, Project B will always have a
shorter payback than Project A.
e. If the WACC increases, the IRR of both projects will decline.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc95f9c79-eacb-4b5e-b821-d270a5f2e910%2F7d9ad49f-27ba-49c1-9674-a74d08f1533b%2Fq2na0td_processed.png&w=3840&q=75)
![Phoenix has carried on business for a number of years as a retailer of a wide variety of consumer products and it
operates from a number of stores. In recent years the entity has found it necessary to provide credit facilities to its
customers in order to maintain growth in revenue. As a result of this decision the liability to its bankers has
increased substantially. Extracts from the financial statements for the year are provided below.
INCOME STATEMENTS FOR THE YEARS ENDED 30 JUNE
Revenue
Cost of sales
Gross profit
Other operating costs
Profit before interest
Interest from credit sales
Interest payable
Profit before taxation
Income tax expense
Profit for the year
STATEMENTS OF FINANCIAL POSITION AT 30 JUNE
Property, plant and equipment
Inventories
Trade receivables
Cash
Total assets
Share capital
Reserves
Bank loans
Other interest bearing borrowings
Trade payables
Tax payable
Total equity and liabilities
Other information
1,1988**9²07|
1,850
(1.250)
|៖ហ៊ុន ស៊ុនស៊ិឡ
(550)
ខ្លារ គឺ ៖ ផ្ន | ® 6 8៩៩
20X7
Sm
278
400
492
12
1,182
320
200
270
នន្ទ្រ|
20
1,182
Depreciation charged for the three years in question was as follows.
Year ended 30 June
20X7
Sm
55
[²³9³9¶
[²9³³³9¶ 1,838 *H * ** * * *
$**8*8] *** 888 °|B|
*|*|
20X8
$m
60
20x9
$m
70
Required:
Using suitable ratios, analyse the information provided and recommend what actions should be
taken.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc95f9c79-eacb-4b5e-b821-d270a5f2e910%2F7d9ad49f-27ba-49c1-9674-a74d08f1533b%2F9ftu7j_processed.png&w=3840&q=75)
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