Which of the following statements is true?
A)Longer-term projects must offer higher expected rates of return, which translate into higher NPVs.
B)Short-term projects usually have lower costs of capital than long-term projects.
C)Because shorter-term borrowing is cheaper than long-term borrowing, short-term projects are more likely to be positive NPV projects.
D)All of the above are true statements.

Question

Quizplus · Accepted Answer

Short-term projects usually have lower costs of capital than long-term projects because there is less uncertainty associated with short-term investments, making them less risky. However, this does not necessarily mean that short-term projects are more likely to have positive NPVs. The expected rate of return on a project depends on numerous factors besides the cost of capital, such as cash flows and timing, which can vary widely between short- and long-term projects. Therefore, statement A and C are not entirely accurate. Short-term projects usually have lower costs of capital than long-term projects because there is less uncertainty and risk associated with shorter-term projects. Therefore, shorter-term projects may have a lower discount rate, leading to a higher NPV. The other statements are not necessarily always true. Longer-term projects may not always offer higher expected rates of return, and the cost of borrowing may not always be the driving factor in determining project viability.

Which of the Following Statements Is True