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Brunch Co has correctly calculated the following measures for a proposal to invest in motor vehicles for a home delivery service:
– the net present value (NPV) is $650,000
– the return on average capital employed (ROCE) is 14%; and
– the payback period is six years.
Bruch Co’s objective is to maximise the wealth of shareholders. Its cost of capital is 10%, its existing ROCE is 16% and its target payback period is five years.
Required:
Which of the following is true?
A The project is not worthwhile because its ROCE is less than 16%
B The project is worthwhile because the ROCE is greater than the firm’s cost of
capital 10%
C The project is worthwhile because the NPV is positive
D The project is not worthwhile because the payback is more than five yearsSir why isn’t D the answer ?
the targeted payback is 5 years and the actual payback is 6 years so isn’t it true that it is not worthwile?This is not a very good question at all.
However, of the different methods for appraising an investment, technically the best one is calculating the NPV (and this will maximise the wealth of shareholders). The others are targets that might be considered.
It is still a very poor question.
Poor question which means that the paper hasn’t clearly asked the question properly right sir?
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