Which of the Following Statements Is False Regarding an NPV

question 28

Multiple Choice

Which of the following statements is false regarding an NPV analysis?

• A)The cash flows used in the NPV analysis should always be the expected cash flows rather than the promised cash flows.
• B)If the discount rate being used is the weighted average cost of capital for the firm, then the expected cash flows should include any interest expense and other costs associated with
• The debt financing.
• C)The weighted average cost of capital that is used as a discount rate in evaluating the cash flows of a project should be based on the expected interest rate on the debt rather than the
• Promised interest rate on the debt.
• D)The cash flows used in the NPV analysis should incorporate the value of any real options associated with the project.

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Definitions:

Economies of Scale

Cost advantages reaped by companies when production becomes efficient, as the scale of operation increases.

Herfindahl Index

A measure of market concentration, calculated as the sum of the squares of the market shares of all firms within the industry.

Market Power

The ability of a firm or group of firms to manipulate the price or quantity of goods and services in the market, typically by restricting supply to influence prices to their advantage.

Industry

The organized economic activity related to the production, processing, and marketing of goods and services.