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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Definitions:

T-Accounts

A visual representation used in bookkeeping to depict the debit and credit sides of an account, helping in the understanding and organization of financial transactions.

Transactions

Business activities that involve the exchange of goods, services, or funds between two or more parties.

Overapplied Overhead

The condition where the amount of manufacturing overhead allocated to products exceeds the actual overhead costs incurred.

Cost of Goods

The total expense incurred in acquiring or manufacturing the products sold by a business, typically including raw materials and labor costs.