Which of the Following Statements Is False

question 34

Multiple Choice

Which of the following statements is false?

• A) The hurdle rate rule for projects with the option to delay uses a lower discount rate than the cost of capital to compute the NPV, but then applies the regular NPV rule: invest whenever the NPV calculated using this lower discount rate is positive.
• B) While using a hurdle rate rule for deciding when to invest might be a cost-effective way to make investment decisions, it is important to remember that this rule does not provide an accurate measure of value.
• C) When the cash flows are constant and perpetual, and the reason to wait derives solely from interest rate uncertainty, the hurdle rate rule of thumb is always exact. However, when these conditions are not satisfied, the rule of thumb merely approximates the correct decision.
• D) When a firm faces the same uncertainty for most of its investment decisions, using a single profitability index criterion for all projects can provide a useful rule of thumb to account for cash flow uncertainty.

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