Which statement is true regarding capital budgeting: The NPV method considers ti
ID: 2793892 • Letter: W
Question
Which statement is true regarding capital budgeting:
The NPV method considers time value of money, the systemic risk of the project reflects the increase in wealth resulting from this project.
The rate used to discount the cash flows associated with a capital project reflects the firm’s borrowing cost.
A project’s NPV considers the incremental earnings associated with the project.
The IRR method reflects the return that makes the project’s NPV positive.
When evaluating mutually exclusive projects, the financial analyst should always select the project with the highest IRR even if it has a lower NPV.
All the above statements are true.
Explanation / Answer
Net present value = Present value of relevant cash inflows - Present value of relevant cash out flows
Net present value considers only the relevant cash flows. Irrevalevant cash flows are ignored. If irrelevant cash flows are considered, incorrect decisions will be made.
Hence, correct option is A project’s NPV considers the incremental earnings associated with the project.
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