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Click on each question to check your answer.
1. Why are investment decisions more difficult in the public sector than in the private sector?
It is because a wide range of stakeholders may be affected. (p. 245)
2. What is the decision rule using the B/C ratio?
If the B/C ratio is greater than one, then accept the project; otherwise, reject it. (p. 248)
3. List the major elements of the incremental benefit-cost ratio method.
First, identify all relevant alternatives; second, rank-order the projects; third, identify the increment under consideration; fourth, calculate the B/C ratio for the incremental cash flows; fifth, use the incremental B/C ratio to decide which alternative is better; sixth, repeat step three until all increments (projects) have been considered; finally, choose the best alternative from the set of mutually exclusive competing projects. (pp. 249-250)
4. What are the four major differences between government and non-government projects?
They are: project financing, duration of project, quantifying and valuing benefits and costs, and project politics. (pp. 252-256)
5. Why is the method of payback period commonly used in small businesses and what is the major problem of using it?
It is easy to use in order to minimize the payback period (p. 257). The major problem is that it ignores time value of money. (p. 259)