What Rate of Return Should Be Used to Compute the NPV

question 71

Multiple Choice

What rate of return should be used to compute the NPV of a proposed purchase of Smiley's,an operating business?

• A)A discount rate equal to Smiley's current return on equity
• B)The discount rate applicable to other investments with similar risks
• C)A discount rate equal to Smiley's net profit percentage
• D)The rate of interest charged by a bank for a loan similar in size to the cost of the purchase
• E)A discount rate that makes the NPV of the proposed purchase positive

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