Question

Identify the simplifying assumptions usually made in net present value analysis.

A. All cash flows other than the initial investment occur at the end of periods.unanswered.
B. All cash flows generated by the investment project are immediately reinvested at a rate of return greater than the discount rate.unanswered.
C. All cash flows generated by the investment project are immediately reinvested at a rate of return equal to the discount rate.
D. All cash flows occur at the beginning of the periods.unanswered.
E. The time value of money is ignored when evaluating investment proposals under the net present value analysis.

Answer 1

All cash flows other than the initial investment occur at the end of periods.

All cash flows generated by the investment project are immediately reinvested at a rate of return equal to the discount rate.

Step-by-step explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.

NPV is a capital budgeting method

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.

When choosing between positive NPV projects, choose the project with the highest NPV first because it is the most profitable

For example, a project costs 100. the cash flow in year 1 and 2 is $500 each. the discount rate is 10%

the NPV can be calculated using the financial calculator

NPV = $767.77

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute