QUESTIONS

1. How is a project classification scheme (for example, replacement, expansion into new
markets, and so forth) used in the capital budgeting process?
2. Explain why the NPV of a relatively long-term project, defined as one for which a high
percentage of its cash flows are expected in the distant future, is more sensitive to
changes in the cost of capital than is the NPV of a short-term project.
3. Are there conditions under which a firm might be better off if it were to choose a
machine with a rapid payback rather than one with a larger NPV?
4. What does it mean for projects to be mutually exclusive? How should managers rank
5.
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mutually exclusive projects?

What are three alternative current asset financing policies? Is one best?
Identify and explain three alternative current asset investment policies?
What are the principal components of working capital?
What is the fundamental trade-off that managers face when managing working capital?