Which of the following statements regarding estimation errors in calculating NPVs is correct?
A)For short-term projects, an error in estimating the appropriate cost of capital will result in a much larger error in the NPV than the same percentage error in estimating the cash
Flows.
B)For long-term projects, an error in estimating the cash flows will result in a much larger error in the NPV than the same percentage error in the cost of capital.
C)For short-term projects, an error in estimating the cash flows will result in a much larger error in the NPV than the same percentage error in the cost of capital.
D)For long-term projects, it is more difficult to estimate the appropriate cost of capital to use than it is to estimate cash flows that are expected to occur in the distant future.

Question

Quizplus · Accepted Answer

For short-term projects, an error in estimating the cash flows will result in a much larger error in the NPV than the same percentage error in the cost of capital. This is because the cash flows for short-term projects are usually more certain, whereas the appropriate cost of capital can be more subjective and prone to estimation errors. For long-term projects, the opposite is true – the distant cash flows are subject to more uncertainty and estimation errors, which can result in a larger error in the NPV compared to a percentage error in the cost of capital.

Which of the Following Statements Regarding Estimation Errors in Calculating