Which Method for Evaluating Capital Investment Proposals Reduces the Expected

question 48

Multiple Choice

Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?

• A) net present value
• B) average rate of return
• C) internal rate of return
• D) cash payback

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Definitions:

Profit

Profit is the financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Call Premium

The additional amount that the price of a call option exceeds its intrinsic value, often influenced by time remaining until expiration and volatility.

Put Premium

The price that an investor pays for the right but not the obligation to sell a specified amount of an underlying asset at a predetermined price within a specified time frame.

Long Straddle

An options trading strategy that involves purchasing both a call and a put option on the same asset with the same expiration date and strike price, betting on volatility.