Question

Which of the following statements is CORRECT? A) The NPV method is regarded by most academics as being the best indicator of a project's profitability, hence most academics recommend that firms use only this one method and disregard other methods. B) The NPV method was once the favorite of academics and business executives, but today most authorities regard the MIRR as being the best indicator of a project's profitability. C) A project's NPV depends on the total amount of cash flows the project produces, and the cash flows are discounted at the rate of IRR instead of the WACC. D) The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted, but generally speaking, they always give the same recommendation regarding the acceptability of a normal, independent project.

Answer 1

1. Option d is correct option. NPV is better than IRR in mutually exclusive projects and both are good for independent project.

2. Book Value =Original Cost*(1-Depreciation) =20*(1-80%) =4
After tax salvage value =Salvage Value-(Salvage Value-Book Value)*Tax Rate =6-(6-4)*40% =5.2 million
(Option d is correct option)

3. Option b is correct option. Shift from straight line to Macrs rate
Other options decreases NPV