Question 56 Which of the following decision rules uses an arbitrary cutoff and d

Question

Question 56

Which of the following decision rules uses an arbitrary cutoff and does not consider the time value of money?

Select one:

a. Payback period

b. Discounted payback

c. Average accounting return

d. Internal rate of return

e. Net present value

Question 57

Your company is considering the purchase of a fleet of cars for $200,000. It can borrow at 6%. The cars will be used for four years. At the end of four years they will be worthless. You call a leasing agent and find that the cars can be leased for $55,000 per year. The corporate tax rate is 34% and the cars belong in CCA class 10 (a 30% class), what is the net advantage to leasing?

Select one:

a. $5,399

b. $1,802

c. $3,434

d. $3,961

e. $1,134

Question 58

In most industries, planning beyond the period of one year is not very useful.

Select one:

True

False

Question 59

Diversification will NOT reduce the market risk of your portfolio.

Select one:

True

False

Question 60

Generally, bankruptcy costs have no impact on a firm’s decision to increase debt financing.

Select one:

True

False

Explanation / Answer

Question 56:-

Answer = A) Payback period - It describes us that in how much time we will get back our initial investment hence it uses a arbitrary cutoff, and since it compare simple cashflow not the dicounted one and hence it also does not cosider time value of maoney.

Option b- Dicounted payback is invalid as because it is dicounted to its present value and hence it used the time value of money.

Option C- Average accounting return is also invalid as it shows the return and hence it does not have any arbitrary cutoffs.

Optiion D) IRR shows the return from project and hence it is also does not have any arbitrary cutoff hence it is also invalid.

Option E)NPV uses time value of money and hence it is also invalid.

Hence the answer will be OPTION A.

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