What is the primary drawback of using simple economic measures like pay-back time and ROI for project evaluation?
Explanation
Simple economic measures like pay-back time and ROI are useful for quick, preliminary project screening. However, their major flaw is that they ignore the 'time value of money,' treating a dollar earned today as equal to a dollar earned years from now. Methods like NPV and DCFROR are preferred for detailed analysis because they correct for this.
Other questions
In a project cash flow diagram, what does the region designated C-D represent?
According to the rule of thumb provided, what is a typical estimate for working capital as a percentage of the fixed capital for petrochemical plants?
What is the primary difference between a mortgage and a debenture in debt financing?
If a company is financed with 55 percent debt at an 8 percent interest rate and 45 percent equity with an expected return of 25 percent, what is the overall cost of capital?
What is the formula for calculating after-tax cash flow (CF) when considering gross profit (P), tax allowances (D), and the tax rate (tr)?
Under the MACRS depreciation method, what is the depreciation rate for an asset with a five-year recovery period in the third year of its life?
What is the simple pay-back time for a project with a total investment of 100 million USD and an average annual income of 50 million USD, before considering taxes?
What defines the Discounted Cash Flow Rate of Return (DCFROR) of a project?
For a project with a 10-year life and a 15 percent interest rate, what is the annual capital charge ratio (ACCR)?
When conducting a statistical risk analysis, what formula is used to estimate the mean value (x bar) from a most likely value (ML), a high value (H), and a low value (L)?
Which of the following is NOT typically included in the calculation of working capital?
In corporate finance, what does the Return on Equity (ROE) measure?
Why is straight-line depreciation often the preferred method for large corporations in the U.S. despite being less favorable than accelerated methods like MACRS?
A plant modification increases the yield from 70 percent to 75 percent. The plant produces 10,000 metric tons per year, raw material costs are 500 USD per metric ton, and the additional investment is 1,250,000 USD. What is the pretax ROI, assuming the extra product cannot be sold and the benefit is from raw material savings?
In a sensitivity analysis for a project, which parameter variation range is typically assumed for the ISBL capital investment?
What is the primary reason that working capital is not depreciated?
According to the typical start-up schedule in Table 9.2, what activities and cash flows occur in the third year of a project?
What is the relationship between Return on Assets (ROA), Return on Equity (ROE), and the Debt Ratio (DR)?
When is the annualized cost method particularly useful for comparing equipment?
A carbon steel heat exchanger costs 140,000 USD and has a 5-year life. A stainless steel version has a 10-year life. If the cost of capital is 12 percent, what is the annualized capital cost of the carbon steel exchanger?
What confidence level does an estimator have that a normally distributed project cost will be less than the mean plus 1.65 standard deviations?
What is an 'incremental ROI' primarily used to evaluate?
In a cash flow diagram, what is the 'break-even point'?
What does a company's cash flow statement primarily summarize?
What is the typical depreciation period for 'roads, docks, and other civil infrastructure' under the MACRS system?
A chemical plant has a fixed capital investment of 100 million USD and generates 50 million USD gross profit annually. Using straight-line depreciation over 10 years and a 21 percent tax rate, with taxes paid based on the previous year's income, what is the cash flow in year 2?
What is the 'time value of money' concept in project evaluation?
For the project in Example 9.1, using MACRS depreciation, what is the Net Present Value (NPV) at a 12 percent interest rate?
How is the standard deviation (Sx) estimated in a statistical risk analysis, given a high value (H) and a low value (L) for an estimate?
For the adipic acid plant in Example 9.5, what is the simple pay-back period, based on the fixed investment and average annual cash flow during the revenue-generating years?
What is a major reason for the financial correlation between capital spending and company sales or assets, as shown in Table 9.7?
What is the book value of an asset?
What is a 'hurdle rate' in the context of project selection?
In the context of the factorial method for estimating installed costs, what are 'Lang factors' used for?
What type of project is primarily aimed at expansions of existing units?
An ISBL capital cost estimate for an ethanol plant is 130 million USD with an error range of negative 30 percent / positive 50 percent. What is the estimated mean value (x bar) for this cost?
In a cash flow statement, noncash charges such as depreciation are handled in which way to determine the cash flow from operating activities?
Which of the following investment incentives involves the government making a direct cash contribution towards the initial investment?
According to Section 9.4.3, under the U.S. tax code, what type of property must be depreciated using the straight-line method?
Why is the Net Present Value (NPV) of a project always less than its total future worth?
What is the key advantage of DCFROR (IRR) over NPV when comparing projects of very different sizes?
What is the rule of thumb for annualizing capital cost, derived from the ACCR and other fixed cost factors?
In a formal risk analysis, what is the purpose of a Monte Carlo simulation?
A preliminary ISBL cost estimate is 130 million USD (-30%/+50%) and the OSBL cost is 50 million USD (range 40M-60M). Both means should be increased by 10 percent for engineering. What is the combined total mean project cost?
What is a primary constraint on a company's project portfolio, aside from capital availability?
When comparing two methods for a project from Example 9.5, if the second method is within the range of accuracy of the first, and the first is very close to the upper end of the range predicted by the second, what does this suggest?
For the adipic acid project, it is stated that the calculated TCOP is greater than the projected annual revenue. What does this suggest about the project's viability?
What is the typical value for working capital turnover in the chemical industry, defined as the ratio of annual revenues to average working capital?
For the adipic acid plant in Example 9.9, with capital costs known to within negative 10 to positive 30 percent and operating cash flow to within 10 percent, what is the calculated standard deviation of the NPV after 10 years of production?