The use of natural resources in an economic activity involves setting up a project forharvesting (i.e. extracting) these resources. For the project to be viable, both economic andfinancial indicators - such as net present value (NPV) and internal rate of return (IRR)considering time value of money - are employed. a) Briefly explain the concept of "time value of money". b) Moreover, explain how you will use NPV and IRR to determine the viability of a project.

The use of natural resources in an economic activity involves setting up a project forharvesting (i.e. extracting) these resources. For the project to be viable, both economic andfinancial indicators - such as net present value (NPV) and internal rate of return (IRR)considering time value of money - are employed. a) Briefly explain the concept of "time value of money". b) Moreover, explain how you will use NPV and IRR to determine the viability of a project.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 5QTD

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The use of natural resources in an economic activity involves setting up a project for harvesting (i.e. extracting) these resources. For the project to be viable, both economic and financial indicators - such as net present value (NPV) and internal rate of return (IRR) considering time value of money - are employed. a) Briefly explain the concept of "time value of money". b) Moreover, explain how you will use NPV and IRR to determine the viability of a project.
How can the Cash flow be considered to evaluate the economic meritof any investment project?
Mathematically, how can we determine the rate of return for a project's cash flow?
Which of the following is an advantage of Net present value? a. Investment potential ignored b. Useful in evaluating mutually exclusive projects c. Considers time value of money d. Easy to calculate
Which of the following terms accurately describe what a resource is worth in its next- best use. a. Sunk cost b. Opportunity cost c. Incremental cash flow d. Externality
Explain how a net present value (NPV) profile is used to compare capital projects. How does this profile compare to that of internal rate of return (IRR)? How does reinvestment affect both NPV and IRR? Support your rationale with at least one citation from the literature.
What is the MOST important variable of the financial planning process? Select one: a. The costs b. The capacity of the fixed asset c. The pro forma income statement d. The sales forecast
Define “the stand-alone principle” applying in evaluating projects and discuss the types of cashflows in project evolution.
Discuss the meaning of the term “relevant cash flow” in the context of investment appraisal, giving examples to illustrate your discussion.
Why do we need to predict how certain costs will behave in response to change activity in project cash-flow analysis?
Which approach to investment analysis is "best" in terms of accounting for both the timing and amount of revenue streams from a potential investment? A. the payback period B. the simple rate of return C. the net present value D. the internal rate of return
Relate the idea of cost of capital to the opportunity cost concept. Is the cost of capital the opportunity cost of project money?