When Using the Pure Play Approach for a Proposed Investment

question 92

Multiple Choice

When using the pure play approach for a proposed investment, a firm is primarily seeking a rate of return which:

• A) is based on the actual source of funds that will be used to fund the project.
• B) creates a positive net present value for the project.
• C) reflects the size and life of the project.
• D) most closely correlates with the proposed investment's internal rate of return.
• E) best matches the risk level of the proposed investment.

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Definitions:

Income Tax Expense

The amount of income taxes a company expects to pay for the current tax year, accounting for deferred taxes.

Book Income Before Income Tax

The income that a company reports on its financial statements before the deduction of income tax expenses.

Tax Depreciation

The depreciation expense allowed by tax authorities to account for the reduction in value of a tangible asset over its useful life, intended to provide a tax shield for businesses.

Book Depreciation

The portion of an asset's initial cost that is allocated as an expense over its useful life on the financial statements, according to accounting standards.