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Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
An advantage of the payback period rule is that it ______

I. adjusts for uncertainty of early cash flows.
II. discounts cash flows.
III. is simple to use.
Answer
Correct Answer: III only

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
An advantage of the payback period rule is that it ______

I. adjusts for uncertainty of early cash flows.
II. discounts cash flows.
III. is simple to use.
Answer
?

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
Question
An advantage of the payback period rule is that it ______

I. adjusts for uncertainty of early cash flows.
II. discounts cash flows.
III. is simple to use.
Answer
Correct Answer: III only
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dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

Original toplevel document

Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.

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