Question 4 3 pts The Cash Payback Method O Is preferable to

Question 4 3 pts The Cash Payback Method: O Is preferable to the Net Present Value method for evaluating relative profitability Considers discounted cash flow O Reflects the total life of the investment project O Includes calculations of depreciation tax shields O None of the above All of the above Question5 3 pts The Average Rate of Return: Is not as understandable for management as NPV O Is based strictly on the value of the Initial Investment Considers the financial statement impact of an investment rather than cash flows consequences Takes into account the time value of money O None of the above All of the above

Solution

4. Answer: None of the above.

The cash payback is computed by dividing the initial investment by the annual net cash inflows. It does not consider the discounted cash flows, nor does it reflect the total life of the investment project or the calculation of depreciation tax shields. Also since it does not consider the time value of money, it is also not preferable to the net present value method. Hence none of the options given are correct.

5. Answer: Considers the financial statement impact of an investment rather than cash flows consequences.

The average rate of return is computed by dividing the net income by the initial investment. It thus takes into account the financial statement impact of the investment but not the cash flows from the investment. It does not take into account the time value of money.