Question

When the present value analysis of a proposed investment results in an indication that the

proposal has a rate of return greater than the cost of capital, the investment might not be
made because:
A. the quantitative analysis indicates that it should not be made.
B. management's assessment of qualitative factors overrides the quantitative analysis.
C. the timing of the cash flows of the investment will not be as assumed in the present value
calculation.
D. post-audits of prior investments have revealed that cash flow estimates were consistently
less than actual cash flows realized.

Answer 1

When the rate of return of a proposed investment exceeds the cost of capital, the investment might still not be made due to factors such as timing of cash flows, qualitative assessments by management, and previous discrepancies between projected and actual cash flows.

Step-by-step explanation:

When the present value analysis of a proposed investment results in an indication that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:

1. The timing of the cash flows of the investment will not be as assumed in the present value calculation. Different factors can affect the timing of cash flows, such as changes in market conditions or delays in project execution.
2. Management's assessment of qualitative factors overrides the quantitative analysis. Even if the numerical analysis indicates a positive return, there may be subjective factors that make the investment unfavorable in the eyes of management.
3. Post-audits of prior investments have revealed that cash flow estimates were consistently less than actual cash flows realized. Historical data showing a consistent deviation between projected and actual cash flows may lead to caution in making similar investments.