Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 33

Present value analysis—effects of estimation errors Capital budgeting analysis involves the use of many estimates.

Required:

For each of the following estimation errors, state whether the net present value of the project will be too high or too low:

a. The investment is too high.

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b. The cost of capital is too low.

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c. The cash flows from the project are too high.

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d. The number of years over which the project will generate cash flows is too low.