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:

Lack of Belief

A state in which an individual does not hold certain convictions or convictions at all regarding a specific matter or in general.

Undue Influence

A situation where an individual is able to influence another person's decisions due to a special relationship, often leading to unfair outcomes.

Relationships Affected

Refers to how interpersonal, societal, or business connections are influenced by certain events or decisions.

Voidable Contract

A contract that appears valid and enforceable on the surface but may be declared void by one of the parties based on certain grounds, such as fraud or coercion.