When Using the NPV Method for a Particular Investment Decision

question 22

Multiple Choice

When using the NPV method for a particular investment decision, if the present value of all cash inflows is greater than the present value of all cash outflows, then:

• A) the discount rate used was too high.
• B) the investment provides an actual rate of return greater than the discount rate.
• C) the investment provides an actual rate of return equal to the discount rate.
• D) the discount rate was too low.

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Definitions:

Zero Growth

A situation in which a company or economy sees no increase in income, output, or other measures of financial performance over a period.

Common Stockholders

Owners of common shares in a corporation, having voting rights and potentially receiving dividends.

Cumulative Preferred

Refers to preferred stock where dividends that were not paid in the past must be paid out to preferred shareholders before dividends can be distributed to common shareholders.

Proposed Acquisition

A potential financial transaction where one company offers to purchase or merge with another entity.