When We Assume in Our Calculations for Capital Budgeting Decisions

question 20

Multiple Choice

When we assume in our calculations for capital budgeting decisions that all cash flows occur at the end of individual years during the life of an investment project when, in fact, they flow more or less continuously during those years, which of the following statements is true?

• A) The internal rate of return (IRR) of the project will likely be overstated.
• B) The net present value (NPV) of the project will likely be overstated.
• C) Inconsistent errors will exist in either NPV or IRR.
• D) The stated (i.e., calculated) net present value (NPV) of the project will likely be understated.
• E) The use of DCF models will produce erratic results.

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Definitions:

Perpetual Inventory System

A systematic approach to maintaining accurate inventory records that adjust in real-time with each purchase or sale of inventory items.

Freight-In

The cost of transporting goods into a business, treated as part of the cost of inventory in the calculation of the cost of goods sold.

Discounts

Reductions to the selling price of goods or services, often used as a sales strategy to encourage purchases.

Purchased Merchandise

The act of buying goods for sale, often regarded as inventory in the books of a retailer or distributor.