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 involves discounting all expected cash flows (both inflows and outflows) at a required rate of return (which may be the cost of capital). The resulting net present value is the difference between the present value of cash inflows and the present value of cash outflows. Therefore, statement D correctly describes the NPV method. Statement A is incorrect because the project with the highest NPV, not IRR, should be selected. Statement B is partially correct but incomplete because it does not mention the discounting of cash outflows. Statement C is also incomplete because it does not explicitly state that the net present value should be positive for the investment to be acceptable.

In Regard to the NPV Method,which of the Statements Below