The two cardinal rules that financial analysts should follow to avoid errors are: (1)in the NPV equation,the numerator should use income calculated in accordance with generally accepted accounting principles,and (2)all incremental cash flows should be considered when making accept/reject decisions for capital budgeting projects.

Question

Quizplus · Accepted Answer

The first rule is incorrect because in the NPV (Net Present Value) equation, the numerator should use cash flows, not income calculated according to generally accepted accounting principles (GAAP). The second rule is correct, as all incremental cash flows should indeed be considered in capital budgeting decisions.

The Two Cardinal Rules That Financial Analysts Should Follow to Avoid