Assume that a firm has accurately calculated the net cash flows relating to an investment proposal. If the net present value of this proposal is greater than zero and the firm in not under the constraint of capital ratio

CS Executive · Financial and Strategic Management · PYQS · June 2024
Assume that a firm has accurately calculated the net cash flows relating to an investment proposal. If the net present value of this proposal is greater than zero and the firm in not under the constraint of capital rationing, then the firm should :
(A) Calculate the IRR of this investment to be certain that the IRR is greater than the cost of capital
(B) Compare the profitability index of the investment to those of other possible investments
(C) Calculate the payback period to make certain that the initial cash outlay can be recovered within an appropriate period of time
(D) Accept the proposal, since the acceptance of value-creating investments should increase shareholder wealth

Answer & Explanation:

Correct Answer: Option (D)

Official answer key: (D).

Topics: Financial Management

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