In regard to the NPV method, which of the statements below is TRUE?
A) In the NPV Model, if two projects are being compared, the one with the highest IRR is selected.
B) In the NPV Model, the present cash flows are discounted at the rate r, the cost of capital.
C) In the NPV Model, most future cash flows are stated in present value or current dollars and the inflow is "netted" against the outflow to see if the net amount is positive or negative.
D) In the NPV Model, the net present value of an investment is the present value of all benefits (cash inflow) minus the present value of all costs (cash outflow) of the project.

Question

Quizplus · Accepted Answer

The NPV method calculates the net present value of an investment by finding the present value of all future cash inflows and subtracting the present value of all future cash outflows. This is done by discounting the cash flows at the project's cost of capital. The project with the highest net present value is preferred over others. Option A is incorrect as IRR is a different method used for project evaluation. Option B is partially correct, as present cash flows are discounted at the cost of capital to find the NPV. However, the statement is incomplete as it does not explain the net present value calculation. Option C is incorrect as it does not explain the net present value calculation, and all cash flows are discounted to their present value, not just future cash flows.

In Regard to the NPV Method, Which of the Statements