L4M2 Exam Dumps | A company is evaluating two investment projects: Project A and Project B. Project A has a high initial

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Question 39

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Question 39/136

A company is evaluating two investment projects: Project A and Project B. Project A has a high initial cost but generates substantial cash flows over time. Project B has a lower initial cost but generates modest cash flows consistently. The company's cost model indicates a payback period of three years for Project A and a payback of four years for Project B. Which of the following statements is correct regarding the cost models and cash flow profiling for these projects?

A. Project A has a shorter payback period, making it a quicker return on investment compared to Project B

B. Project A's higher initial cost is a disadvantage, and its payback period should be extended for better profitability

C. Project B's lower initial cost allows for faster profit realisation, making it the better investment choice

D. Project B's modest and consistent cash flows make it a risky investment option due to a longer payback period

Correct Answer: A

Detailed Explanation:
Project A's shorter payback period means the initial investment is recovered more quickly, which is often preferred in cost models. The higher initial cost is offset by substantial cash flows, making it the more viable option based on ROI. Reference: CIPS Level 4, Investment Appraisal Techniques.

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