If a company is in the situation of having unlimited capital funds, the best decision rule, considering only financial factors, is for the company to invest in all projects in which:
A) The payback period is short.
B) The accounting (book) rate of return (ARR) is greater than its current return on invested capital (ROI).
C) The net present value (NPV) is greater than the cost of capital.
D) The internal rate of return (IRR) is greater than zero.
E) The NPV is greater than zero.

Question

Quizplus · Accepted Answer

The best decision rule, considering only financial factors, is to invest in all projects in which the NPV is greater than zero. This ensures that the company will generate value for its shareholders, as the NPV represents the present value of future cash inflows minus the initial investment. Projects that have a positive NPV create value, while those with a negative NPV destroy value. Choosing projects based on the payback period, accounting rate of return, or internal rate of return may lead to suboptimal decisions, as these methods do not consider the time value of money or the cost of capital.

If a Company Is in the Situation of Having Unlimited