Given That the Net Present Value (NPV) Is Generally Considered

question 245

Multiple Choice

Given that the net present value (NPV) is generally considered to be the best method of analysis, why should you still use the other methods?

• A) The other methods help validate whether or not the results from the net present value analysis are reliable.
• B) You need to use the other methods since conventional practice dictates that you only accept projects after you have generated three accept indicators.
• C) You need to use other methods because the net present value method is unreliable when a project has unconventional cash flows.
• D) The average accounting return must always indicate acceptance since this is the best method from a financial perspective.
• E) The discounted payback method must always be computed to determine if a project returns a positive cash flow since NPV does not measure this aspect of a project.

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Definitions:

M&M Proposition I

A theorem stating that in a perfect market, the market value of a company is unaffected by how that company is financed, regardless of whether through debt or equity.

Debt

An amount of money borrowed by one party from another, to be repaid with interest.

M&M Proposition II

A theory in corporate finance that asserts the cost of equity is a linear function of the company's debt/equity ratio, under the assumption of no taxes and financial distress costs.