Which of the Following Statements Regarding NPV Analysis Is Correct

question 321

Multiple Choice

Which of the following statements regarding NPV analysis is correct?

• A) NPV calculations do not depend critically on cash flow projections.
• B) NPV calculations are only as good as the information that goes into their calculation.
• C) Negative NPV projects should be scrutinized to make sure there is a sound economic basis underlying them.
• D) Positive NPV projects that have relatively low levels of fixed costs should be more heavily scrutinized than projects with relatively high levels of fixed costs.
• E) NPV calculations will lead to correct decision-making even if the wrong discount rate is used.

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Definitions:

Long-run Equilibrium

A state in which all factors of production and costs are variable, leading to a situation where economic profits have been normalized or eliminated due to competition.

Constant Costs

Costs that do not change with the level of output or activity within a certain range.

Short-run Supply Curve

A graphical representation showing the relation between the price of a product and the quantity of the product that a firm is willing and able to sell, given fixed resources.

MC Curve

A graph that shows the relationship between the marginal cost and the quantity of output produced, typically upward sloping.