Dana Leone, Level 2 candidate in the CFA Program, is a manager in the capital planning division of a large consumer products company. Today, she must decide whether to recommend Project Forrest or Project Trieste to the Division Director. Leone's assistant has determined the following information about the projects
(which are of approximately the same size and life):
Note:NPV = Net Present Value -
MIRR = Modified Internal Rate of Return
PBP = Pay Back Period -
WACC = Weighted Average Cost of Capital
Based on the information in the above table, which of the following statements is FALSE? If company management is most concerned with:
Click on the arrows to vote for the correct answer
A. B. C. D.A
Since Leone can recommend either Forrest or Trieste, this question should be answered using the decision rules for mutually exclusive projects. For a company most interested in shareholder wealth and increasing the value of the firm (which are the same concept), Project Trieste is best because it has the higher NPV.
NPV is the measure that indicates the direct impact on shareholder wealth. The other statements are true. The PBP measures liquidity, i.e., the shorter the PBP, the higher the liquidity.The IRR method does provide a measure of safety margin (and Project Forrest does have the highest IRR).