Which of the following statements is FALSE regarding the INTEREST RATE used in NPV calculations?
a. The interest rate used may be higher or lower than the investment's actual internal rate of return.
b. The interest rate used may be adjusted for uncertainty.
c. Some companies use their cost of capital as the discount rate.
d. It should be equal to the maximum required rate of return needed to make the investment profitable.
Interest Rate Used in NPV Calculations:
One of the management accountant's tasks is to evaluate capital expenditure projects. Among capital expenditure appraisal techniques is NPV (Net Present Value). As far as the net cash flows refer to the future times, these should be equalized or brought to the present, in other words, future cash flows should be discounted (time value of money).
Answer and Explanation:
While using NPV appraisal technique for the evaluation of a capital expenditure project, the discounted net cash flows are being estimated, i.e....
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from Financial Accounting: Help and ReviewChapter 4 / Lesson 1