Which of the Following Statements Is CORRECT

question 103

Multiple Choice

Which of the following statements is CORRECT?

• A) The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.
• B) The NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes reinvestment at the risk-free rate.
• C) The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
• D) The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.
• E) The NPV method assumes that cash flows will be reinvested at the cost of capital, while the IRR method assumes reinvestment at the IRR.

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Definitions:

Book Value

The net value of a company's assets minus its liabilities and preferred stock, representing the value of the company according to its financial statements.

Expected Earnings

Predictions or estimates of a company's profit during a specific period in the future, often used by investors to make informed decisions.

Unlevered Cost

The cost of an investment that does not take into account the effect of financial leverage, or borrowing.

Debt-Equity Ratio

The debt-equity ratio is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.