The Net Present Value Method of Evaluating Proposed Investments

question 24

Multiple Choice

The net present value method of evaluating proposed investments:

• A) discounts cash flows at the minimum rate of return.
• B) measures a project's time adjusted rate of return.
• C) ignores cash flows beyond the payback period.
• D) applies to only mutually exclusive investment proposals.

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Definitions:

Perpetuity Rate of Return

The rate at which an infinite series of cash flows, received indefinitely, is discounted to equate its present value.

Stated Dividend

The amount of dividend that a company declares to be paid out to its shareholders, usually expressed as a fixed amount per share.

Cost of Capital

The yield a corporation needs to generate on its investments in order to preserve its market value and draw in financing.

Internal Rate of Return

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero, used to evaluate the profitability of potential investments.