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Ques –
Which of the following statements about investment appraisal methods is correct?
1) The return on capital employed method considers the time value of money.
2) Return on capital employed must be greater than the cost of equity if a project is to be accepted.
3)Riskier projects should be evaluated with longer payback periods.
4) Payback period ignores the timing of cash flows within the payback period.should it be 2nd? and why 4th is the answer, isnt payback period is all abt the cash flow recovered in the time period.
2 is not the answer because we do not compare the ROCE with the cost of equity. ROCE is a profit measure and anyway we appraisal at the cost of capital, not just the cost of equity.
4 is the answer. Suppose an investment costs 5,000 and gives a cash inflow of 1,000 in 1 year and 4,000 in 3 years time. The payback period is 3 years.
Suppose instead there is a cash flow of 4,000 in 1 year and 1,000 in 3 years time. The payback period is still 3 years.I do explain this in my free lectures.
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