Which of the following statements is false regarding an NPV analysis?
A)The cash flows used in the NPV analysis should always be the expected cash flows rather than the promised cash flows.
B)If the discount rate being used is the weighted average cost of capital for the firm, then the expected cash flows should include any interest expense and other costs associated with
The debt financing.
C)The weighted average cost of capital that is used as a discount rate in evaluating the cash flows of a project should be based on the expected interest rate on the debt rather than the
Promised interest rate on the debt.
D)The cash flows used in the NPV analysis should incorporate the value of any real options associated with the project.

Question

Quizplus · Accepted Answer

Statement B is false because when using the weighted average cost of capital (WACC) as the discount rate in NPV analysis, the expected cash flows should not include interest expense or other costs associated with debt financing. This is because WACC already accounts for the cost of debt and equity financing, and including these costs again in the cash flows would be double counting.

Which of the Following Statements Is False Regarding an NPV