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A company's short term financial plan might include?

H

hanshua

Member
Can anybody explain the reson, thank you very much!!
 
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Help!

A company should NOT go ahead with a capital project if:
Choose ONLY one answer.

a. Its shareholders could invest in an alternative project offering a higher expected internal rate of return

b. It could use the available funds to re-pay all its debts

c. The project's Net Present Value using a risk-adjusted discount rate is negative

d. It could invest in an alternative project offering a higher expected internal rate of return
 
Hi

I feel the answer is C as in the first case ( which may be true) though the expected IRR may be high, but the risks also could be high and so it depends on the circumstances and the objectives of hte company at that time.
Yes but one can argue that its a capital project and not an investment policy then y go for a matching concept.
For the second case, answer is no as the amount set aside for capital project may not always be used for meeting debt obligations as generally one may use a debt to finance a capital project.
The third case is appropriate as it is not wise to invest in a capital project if the NPV @ risk adjusted discount rate of the same is negative.. whts the actual answer ???
 
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capital project rationale

hanshua said:
Can anybody explain the reson, thank you very much!!
Click to expand...

I assume the answer is c - there certainly is no point investing in a project if you would be better off doing nothing instead!

not a or d, since neither considers the level of risk, and not b, since the co may be paying a lower rate of interest on the debt than it can receive on the project (after factoring in risk)
 
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