D362 Corporate Finance - Set 1 - Part 3

Correct Answer: A firms cash availability is limited.

If a company is constrained by cash, it may prioritize projects with a shorter payback period, even if the NPV suggests otherwise.

Correct Answer: At the cash break-even point.

When operating cash flow is zero, the project is at its cash break-even point, meaning it is covering all its cash expenses but not generating a profit.

Correct Answer: Accepted because the NPV is positive.

A positive NPV indicates that the project is expected to generate more value than it costs, making it a worthwhile investment.

Correct Answer: Liquidity bias and ease of use.

The payback method is simple to use and is biased toward projects that improve liquidity quickly by returning the investment sooner.

Correct Answer: Positive NPV and IRR greater than the required rate.

A positive NPV and an IRR above the required return indicate that the project will add value to the firm and should be accepted.

Correct Answer: The project never pays back.

At the cash break-even point, the project only covers its cash expenses but does not generate any excess returns, so it does not pay back the initial investment.

Correct Answer: Net income + Depreciation

The bottom-up approach to operating cash flow is calculated as net income plus non-cash charges like depreciation, assuming there is no interest expense.

Correct Answer: Modified internal rate of return that exceeds the required return.

A modified IRR that exceeds the required return indicates the project is expected to generate sufficient returns and should be accepted.

Correct Answer: A decrease in accounts receivable.

A decrease in accounts receivable means that the company is collecting money faster, which increases cash inflows.

Correct Answer: Financial break-even.

The financial break-even point is the sales level at which the NPV of the project equals zero.