Which of the following statements are true? Select 4 that apply.
Discounted payback method of capital appraisal ignores cash flows beyond the discounted payback period.
The net present value is found by discounting all positive cash flows at the project’s cost of capital.
The project is accepted if the IRR is less than the project’s cost of capital.
The IRR is the discount rate which forces the present value of a project’s future cash flows to equal the future value of its costs.
Firms often choose among mutually exclusive projects on the basis of the present value of future costs.
To use the CAPM approach in capital budgeting, we estimate the firm’s beta, multiply this by the market risk premium and add the firm’s risk premium to the risk-free rate to obtain the firm’s cost of retained earnings or cost of equity.
The best proxy for the risk-free rate is the yield on treasury bonds.
Floatation costs are generally material when looking at its effect on the after-tax cost of debt.