FIN 534 RANK Change The World /fin534rank.com FIN 534 RANK Change The World /fin534rank.com | Page 106

d. $219.52
e. $230.49
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FIN 534 Week 6 Chapter 11 Solution
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Which of the following statements is CORRECT?
a. An externality is a situation where a project would have an adverse
effect on some other part of the firm’s overall operations. If the project
would have a favorable effect on other operations, then this is not an
externality.
b. An example of an externality is a situation where a bank opens a new
office, and that new office causes deposits in the bank’s other offices to
decline.
c. The NPV method automatically deals correctly with externalities,
even if the externalities are not specifically identified, but the IRR
method does not. This is another reason to favor the NPV.
d. Both the NPV and IRR methods deal correctly with externalities, even
if the externalities are not specifically identified. However, the payback
method does not.
e. Identifying an externality can never lead to an increase in the
calculated NPV.