The net present value: is equal to the initial investment when the internal rate of return is equal to the required return. is unaffected by the timing of an investment's cash flows. ignores cash flows that are distant in the future. decreases as the required rate of return increases.

The net present value: is equal to the initial investment when the internal rate of return is equal to the required return. is unaffected by the timing of an investment's cash flows. ignores cash flows that are distant in the future. decreases as the required rate of return increases.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 16MC: When using the NPV method for a particular investment decision, if the present value of all cash...

See similar textbooks

Related questions

Q: When using the NPV method for a particular investsment decision, if the present value of all cash…

A: NPV stands for Net present value. It is a method used to evaluate the feasibility of the project.…

Q: If the sum of the incremental cash flows is negative, what is known about the rate of return on the…

A: Incremental Analysis: The method to measure the viability of different options related to business…

Q: A conservative approach to reinvesting projected cash flows (the reinvestment assumption) would use…

A: “Hey, since there are multiple different questions posted, we will answer first question. If you…

Q: Which of the following is true about present value calculations? Other things remaining equal, the…

A: The value of any cash flow at immediate current date is called the present value(PV) which is…

Q: The time value of money concept is given consideration in long-range investment decisions by Group…

A: The time value of money concept is given consideration in long-range investment decisions by :

Q: An increase in the discount rate will____ a. Reduce the present value of future cash flows b.…

A: Present Value of Cash Flows = Cash Flow(1+i)n

Q: u are given two choices of investments, Investment A and Investment B. Both investments have the…

A: Introduction: The term present value can be defined as the current value of future set of cash flows…

Q: Which of the following statements is correct? The NPV method assumes that cash flows will be…

A: Solution:- Net Present Value (NPV) means the net of the present value of cash inflows and initial…

Q: Discounting an investment’s cash flows using the internal rate of return will result in which of the…

A: Introduction: The internal rate of return (IRR) is a research and consulting metric used to assess…

Q: chance that a cash flow will turn out to be worse than the estimate. b. the chance that a…

A: Step 1 The planning process used to assess whether an entity's long-term investment is appropriate…

Q: Why the payback method is often considered inferior to discounted cash flow in capital investment…

A: Payback period is capital budgeting technique which tells how much time will it take for Ann…

Q: Suppose an investment has conventional cash flows with positive NPv. How would it impact your…

A: NPV is the net present value of a project. When the net present value of a project is positive in…

Q: If an investment project will positively affect the cash flows of other products the firm currently…

A: Cannibalization can be defined as the negative effect on the existing business line or the product…

Q: Assume a project has normal cash flows (i.e. the initial cash flow is negative and all other cash…

A: Option B) - All else equal, a project's N.P.V increases as the cost of capital declines.

Q: Differences between the ERR and the IRR include the following: a. The ERR will yield a unique…

A: From the various given statements, we have to find the difference between the internal rate of…

Q: An investment is guaranteed to have a unique value of IRR if which of the following is true? a.…

A: Given: The unique IRR value in the investment.

Q: All of the following statements regarding NPV are true EXCEPT: a. A positive NPV indicates the…

A: Net Present Value : It is the net of present value of cash inflow and present value of outflow.…

Q: Which of the following statements are true regarding the payback period of an investment? It does…

A: Answer: The correct option is (4) All of the above.

Q: echnical problems associated with the internal rate of return include:

A: IRR (Internal Rate of Return): It is the rate of return that makes the net present value of the…

Q: Why is it true that a reinvestment rate is implicitly assumed whenever we find thepresent value of a…

A: Discounting is the method of assessing the real value of a potential transaction or collection of…

Q: An increase in the discount rate will______ O a. Reduce the present value of future cash…

A: This question can be solved with the help of 2 examples. Example 1 Initial investment=15000 Discount…

Q: What is the effect of changes in cash flows, investment cost and cash outflows on profitability…

A: Profitability Index is the ratio that is resulted from dividing the current worth of subsequent year…

Q: The NPV method determines how much the present value of cash inflows exceeds the present value of…

A: The amount of difference between the PV (present value) of cash inflows and cash outflows is called…

Q: In computing the present value of an investment in equipment, the present value of the residual…

A: Net Present value = Present value of future cash flows + Present value of terminal cash flow -…

Q: Explain your answer assuming that all variables are constant except for the one mentioned:

A: Capital budgeting is a method used for finding the profitability of investment proposals. This…

Q: (c) Why is net present value considered to be a superior method of evaluating the cash flows from a…

A: The concepts of capital budgeting tools can be used here to answer the questions. There are…

Q: A disadvantage of using the payback period to compare investment alternatives is that it a. Ignores…

A: Investment decision: Investment decision can be referred to as capital budgeting. It involves…

Q: The net present value of an investment represents the difference between the: present value of cash…

A: To determine the value of NPV, NPV is the difference between the present values of future cash flows…

Q: Why do NPV method and the IRR method sometimes give different rankings of mutually exclusive…

A: Net present value (NPV) is the value of all the cash flow of the investment (positive and negative)…

Q: Calculate the present value and future value of an uneven cash flow stream.

A: A stream of cash flow is uneven when all the amounts in the series of cash flows are unequal .i.e.,…

Q: An investment with a positive total cash flow will always outperform an investment that shows…

A: Positive Cash flows are the annual cash inflow that has been received to the organization on yearly…

Q: An advantage of the net present value method over the internal rate of return model in discounted…

A: The internal rate of return model considers the constant discounting rate for discounting the cash…

Q: g. The amount of money today that is consider equivalent to the cash flows expected to take place in…

A: Capital budgeting is the process of making decisions in long term assets. It is the process of…

Q: why is knowledge of the money market important for carrying out value maximizing working capital…

A: Introduction: For this question, the importance of working capital which helps to manage the short…

Q: Explain how sunk costs and cannibalisation affect the determination of an investment’s incremental…

A: Introduction : . Simply put, sunk costs refers to the costs that has already been incurred and the…

Q: When the underlying riskiness of free cash flows (FCF) decreases, the value of the project O…

A: Free cash flow refers to funds of the company which is freely available to be repaid to the…

Q: The rate of return that equates the present value of cash inflows and outflows is the: A. hurdle…

A: Introduction: Capital budgeting is an investment criterion or decision making mechanism for…

Q: If cashflows are discounted at____ the net present value is zero a. Internal rate of return…

A: Capital Budgeting entails long-term planning and monitoring of capital expenditures, as well as a…

Q: te

A: Introduction : The given question relates to the capital budgeting techniques which are used to…

Q: The profitability index O will never be greater than 1. O does not take into account the discounted…

A: The profitability index helps to compare the project. It measure the attractiveness of the project.…

Q: The basic principle of valuation states that the value of any asset is: O The sum of the present…

A: The present value of an asset is the sum of all future cash flows discounted at the discount rate.

Q: This can occur when a selection among mutually exclusive alternatives is based wrongly on…

A: Answer- Ranking errors can occur when a selection among mutually exclusive alternatives is based…

Q: ssume a project has normal cash flows. All else equal, whic llowing statements is correct? A…

A: The pay back period is the amount of time required to recover the initial amount of investment and…

Q: The discounted payback method discounts cash flows at the opportunity cost of capital and then…

A: Cost of capital denotes that cost which a firm is required to pay to finance the amount for the…

Q: When a capital investment is expected to provide unequal annual cash inflows, the payback period…

A: Payback period: It can be defined as the time that investment takes before it starts generating…

Q: Discounted cash flow capital budgeting techniques do not O take into consideration an unconventional…

A: Discounted cash flow method is a vital capital budgeting technique. It has been explained in the…

Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

The net present value:

is equal to the initial investment when the internal rate of return is equal to the required return.

is unaffected by the timing of an investment's cash flows.

ignores cash flows that are distant in the future.

decreases as the required rate of return increases.

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

If the sum of the incremental cash flows is negative, what is known about the rate of return on the incremental investment?
An increase in the discount rate will______ O a. Reduce the present value of future cash flows O b. Increase the present value of future cash flows c.Have no effect on net present value Od. Compensate for reduced risk
Which of the following is true about present value calculations? Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases. Other things remaining equal, the present value of a future cash flow increases if the investment time period increases.
All of the following statements regarding NPV are true EXCEPT:a. A positive NPV indicates the present value of the cash flows exceeds the initial investment.b. A negative NPV indicates the present value of the cash flows is less than the initial investment.c. An NPV equal to zero indicates the present value of the cash flows is equal to the initial investment.d. The internal rate of return is the discount rate that causes the initial investment to exceed the present value of the cash flows.
If cashflows are discounted at____ the net present value is zero a. Internal rate of return O b. Wighted average cost of capital O c. Higher payback period O d. Any payback period
The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. O C. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. O D. No comparison can be made-we need to know the cash flows to calculate the present value.
When using the NPV method for a particular investment decision, if the present value of all cash Inflows Is greater than the present value of all cash outflows, then _______ . A. the discount rate used was too high B. the investment provides an actual rate of return greater than the discount rate C. the investment provides an actual rate of return equal to the discount rate D. the discount rate is too low
Which of the following discounts future cash flows to their present value at the expected rate of return, and compares that to the Initial Investment? A. internal rate of return (IRR) method B. net present value (N PV) C. discounted cash flow model D. future value method
Why is it true that a reinvestment rate is implicitly assumed whenever we find thepresent value of a future cash flow? Would it be possible to find the PV of a FV withoutspecifying an implicit reinvestment rate?
Discounting an investment’s cash flows using the internal rate of return will result in which of the following? Group of answer choices net present value of one net present value of zero positive net present value negative net present value
The ____ of an investment is the period of time for the ____ to equal the initial cash outlay. a. profitability index; present value of the cash inflows b. payback period; cumulative cash inflows c. payback period; present value of the cash inflows d. None of these are correct
Explain what is meant by the internal rate of return of an investment and discuss its relationship to the NPV of an investment. Explain the problems posed for the use of the IRR when it is necessary (i) to choose between two investments and when (ii) investments are characterised by negative net cash flows at the end of their lives. Discuss and evaluate the use of the payback period as an investment criterion.