When the Present Value Analysis of a Proposed Investment Results

question 29

Multiple Choice

When the present value analysis of a proposed investment results in an indication that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:

• A) the quantitative analysis indicates that it should not be made.
• B) management's assessment of qualitative factors overrides the quantitative analysis.
• C) the timing of the cash flows of the investment will not be as assumed in the present value calculation.
• D)post-audits of prior investments have revealed that cash flow estimates were consistently less than actual cash flows realized.

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Definitions:

Prime Cost

The total cost of direct materials and direct labor incurred in producing goods.

Conversion Cost

The combined cost of direct labor and manufacturing overheads incurred to convert raw materials into finished goods.

Direct Labor

The wages or salaries paid to workers directly involved in the production of goods or services.

Indirect Material Cost

Costs of materials that are part of the production process but are not directly traceable to a finished product.