Which of the following would NOT change a project's present worth?
Answer: A
Preliminary spending is sunk and is the same whichever course is now taken, so it cannot discriminate between the alternatives at all. Rate, salvage value and the timing of receipts each genuinely alter the discounted figure.
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Three of the following justify comparing alternatives on cost alone. The exception is
Answer: B
Correct answer: the alternatives have different outputs
Cost-only comparison is valid when the benefits are identical and cancel. If the outputs differ, the alternative with the lower cost may simply be doing less, and choosing it on cost alone would be choosing the smaller service. The comparison must then be made on net worth rather than on cost.
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An analyst compares a 5-year and a 10-year alternative on present worth over their own lives and recommends the longer. The recommendation is
Answer: C
Correct answer: unreliable, the horizons being unequal
Present worth accumulates over whatever period is used, so the ten-year alternative gets ten years of discounted benefit against the other’s five. It will usually appear larger regardless of merit. The comparison must be made over a common period, or on annual worth, before the recommendation means anything.
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A firm has already spent 2 million on a project now estimated to need 5 million more for benefits worth 4 million. It should
Answer: D
Correct answer: abandon the project, the remaining spending not being justified
The only question is whether spending 5 million to obtain 4 million of benefit is worthwhile, and it plainly is not. The 2 million already spent is sunk and is lost under either course - continuing does not recover it, it merely adds a further million to the loss.
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Assertion: annual worth is preferred to present worth for alternatives with unequal lives. Reason: an annual figure is already expressed per period.
Answer: A
Correct answer: both the assertion and the reason are true and the reason explains the assertion
Both are true and the reason gives the mechanism. Because annual worth is expressed per period, alternatives of different lives can be set beside each other without any repetition arithmetic. The assumption of indefinite repetition at each alternative’s own life is still being made - it is simply implicit rather than laid out.
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Assertion: a project with a positive present worth should always be undertaken. Reason: a positive present worth means it earns more than the minimum attractive rate.
Answer: B
The reason is correct, but under a budget constraint or among mutually exclusive alternatives a project may be acceptable in isolation and still not be the one to choose. Acceptability and selection are separate questions.
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Comparing the least common multiple approach with a defined study period, the study period
Answer: C
Truncating at a chosen horizon is more honest about an uncertain future, at the cost of having to estimate a market value for whatever life remains. That estimate is itself a judgement, so neither approach is free of assumption.
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None of the following affects the choice between two mutually exclusive alternatives except
Answer: D
Correct answer: the difference between their cash flows
A choice between two alternatives turns entirely on how they differ from one another in future cash terms. Money already spent on both, the book value of existing equipment and the depreciation method used for reporting are all either sunk or accounting conventions, and none of them changes with the decision.
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