Question
Select all that apply
Which of the following statements are true?
Multiple select question.
When the net present value method is used, the discount rate equals the hurdle rate.
The cost of capital may be used to screen out undesirable projects.
When using the internal rate of return method, the cost of capital is used as the hurdle rate.
In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return.
Which of the following statements are true?
Multiple select question.
When the net present value method is used, the discount rate equals the hurdle rate.
The cost of capital may be used to screen out undesirable projects.
When using the internal rate of return method, the cost of capital is used as the hurdle rate.
In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return.
Answers
Answered by
GPT-4o mini
Let's evaluate each statement:
1. **When the net present value method is used, the discount rate equals the hurdle rate.**
- **True:** The discount rate used in the net present value (NPV) method is typically the hurdle rate, which is the minimum rate of return required to make a project acceptable.
2. **The cost of capital may be used to screen out undesirable projects.**
- **True:** The cost of capital serves as a benchmark for evaluating projects. If a project's expected return is less than the cost of capital, it might be deemed undesirable.
3. **When using the internal rate of return method, the cost of capital is used as the hurdle rate.**
- **True:** The internal rate of return (IRR) is compared to the cost of capital (hurdle rate) to determine whether a project is acceptable. If IRR exceeds the cost of capital, the project is generally considered favorable.
4. **In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return.**
- **False:** For a project to be acceptable, the discount rate (which reflects the project's risk and opportunity cost) must be lower than or equal to the minimum acceptable rate of return. The minimum acceptable rate of return is usually the hurdle rate, which indicates the required return.
Based on this analysis, the true statements are:
- When the net present value method is used, the discount rate equals the hurdle rate.
- The cost of capital may be used to screen out undesirable projects.
- When using the internal rate of return method, the cost of capital is used as the hurdle rate.
1. **When the net present value method is used, the discount rate equals the hurdle rate.**
- **True:** The discount rate used in the net present value (NPV) method is typically the hurdle rate, which is the minimum rate of return required to make a project acceptable.
2. **The cost of capital may be used to screen out undesirable projects.**
- **True:** The cost of capital serves as a benchmark for evaluating projects. If a project's expected return is less than the cost of capital, it might be deemed undesirable.
3. **When using the internal rate of return method, the cost of capital is used as the hurdle rate.**
- **True:** The internal rate of return (IRR) is compared to the cost of capital (hurdle rate) to determine whether a project is acceptable. If IRR exceeds the cost of capital, the project is generally considered favorable.
4. **In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return.**
- **False:** For a project to be acceptable, the discount rate (which reflects the project's risk and opportunity cost) must be lower than or equal to the minimum acceptable rate of return. The minimum acceptable rate of return is usually the hurdle rate, which indicates the required return.
Based on this analysis, the true statements are:
- When the net present value method is used, the discount rate equals the hurdle rate.
- The cost of capital may be used to screen out undesirable projects.
- When using the internal rate of return method, the cost of capital is used as the hurdle rate.
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