COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The NPV and the IRR approaches will always rank projects in the same order
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The NPV and Payback approaches will always rank projects in the same approaches
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If a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return (IRR) approach
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If a project is found to be acceptable under the NPV approach, it would also be acceptable under the payback approach
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Detailed explanation-1: -If a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return ( IRR ) approach . NPV used the discount factor. IRR is the minimum required return that the project should generate.
Detailed explanation-2: -The discount rate may reflect your cost of capital or the returns available on alternative investments of comparable risk. If the NPV of a project or investment is positive, it means its rate of return will be above the discount rate.
Detailed explanation-3: -Answer and Explanation: The correct answer is A) Accept a project if NPV > cost of investment. The net present value estimates the current worth of a project by taking the present value of the future cash flows minus the cost of investment.
Detailed explanation-4: -Top Answer In case, the NPV is positive, the IRR of the project also exceeds the required return.
Detailed explanation-5: -The NPV method assumes that cash flows will be reinvested at the risk free rate while the IRR method assumes reinvestment at the IRR. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assumes reinvestment at the risk-free rate.