The Net Present Value Approach to Capital Budgeting Requires You

question 97

True/False

The net present value approach to capital budgeting requires you to calculate the present value of each cash flow and then add those present values to arrive at the capital project's net present value.

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Definitions:

Net Operating Income

A company's revenue minus its operating expenses, excluding taxes and interest.

Initial Investment

Initial investment is the initial amount of money spent to start a project, purchase an asset, or embark on a new business venture.

Profitability Index

A financial tool used to measure the relative profitability of an investment, calculated by dividing the present value of future cash flows by the initial investment cost.

Internal Rate

Typically refers to the internal rate of return (IRR), which is a rate of return used in capital budgeting to measure and compare the profitability of investments.