When the Net Present Value (NPV) of a Project Is

question 143

Multiple Choice

When the net present value (NPV) of a project is calculated based on the assumption that the after-tax cash inflows occur at the end of the year when they actually occur uniformly throughout each year, the NPV will:

• A) Not be in error.
• B) Be slightly overstated.
• C) Be unusable for actual decision-making.
• D) Be slightly understated but probably usable.
• E) Produce an error the direction of which is undeterminable.

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Definitions:

Payback Period

The time it takes for an investment to generate an amount of income or cash flows to recover the initial capital outlay.

Incremental Cost Approach

A method used to analyze the financial impact of additional costs incurred when making business decisions.

Discount Rate

In discounted cash flow (DCF) analysis, this rate is applied to calculate the present value of anticipated cash flows.

Working Capital

The difference between a company's current assets and current liabilities, indicating the short-term financial health and operational efficiency.