COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Choose Project A
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Select Project B
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Choose Project A & B as long as there are sufficient funds
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No Select project A& B
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Detailed explanation-1: -Independent projects: If NPV is greater than $0, accept the project. Mutually exclusive projects: If the NPV of one project is greater than the NPV of the other project, accept the project with the higher NPV. If both projects have a negative NPV, reject both projects.
Detailed explanation-2: -A positive NPV indicates that the projected earnings generated by a project or investment-discounted for their present value-exceed the anticipated costs, also in today’s dollars. It is assumed that an investment with a positive NPV will be profitable. An investment with a negative NPV will result in a net loss.
Detailed explanation-3: -A capital budgeting project should be accepted if its NPV is: positive after discounting all the cash inflows and outflows for the project.
Detailed explanation-4: -The decision rule of NPV is to accept a project that has a positive NPV and reject a project that has a negative NPV. A positive NPV at a specified discount rate, indicates that the project is profitable as the initial cost can be compensated by the present worth of the future cash flows.