Determine whether the following statements are true or false: -NPV assumes reinv

Question

Determine whether the following statements are true or false:

-NPV assumes reinvestment of intermediate free cash flows at the cost of capital, while IRR assumes reinvestment of intermediate free cash flows at the IRR.

-NPV is the most theoretically correct capital budgeting decision tool examined in the text.

-The capital budgeting decision-making process involves measuring the incremental cash flows of an investment proposal and evaluating the attractiveness of these cash flows relative to the project's cost.

-The cost of debt capital is obtained by substituting the net proceeds per bond for the bond price in the bond valuation equation and solving for the required return.

-The cost of debt increases relative to the investor's required return due to flotation costs, but decreases relative to the investor's required return due to the tax deductibility of interest.

Explanation / Answer

NPV assumes reinvestment of intermediate free cash flows at the cost of capital, while IRR assumes reinvestment of intermediate free cash flows at the IRR.- True

-NPV is the most theoretically correct capital budgeting decision tool examined in the text.- True

NPV considers time value of money. NPV = Cash Inflow- Cash Outflows

-The capital budgeting decision-making process involves measuring the incremental cash flows of an investment proposal and evaluating the attractiveness of these cash flows relative to the project's cost.- True but it also considers the time value of money

-The cost of debt capital is obtained by substituting the net proceeds per bond for the bond price in the bond valuation equation and solving for the required return. - False

-The cost of debt increases relative to the investor's required return due to flotation costs, but decreases relative to the investor's required return due to the tax deductibility of interest- False

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