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When Using the Net Present Value Model, Which of the Following Assumptions Is/are Used? 1. A) We Assume the Predicted Cash Inflows and

Question

When using the Net Present Value model, which of the following assumptions is/are used? 1. A) We assume the predicted cash inflows and outflows are certain to occur at the times specified. 2. B) We assume perfect capital markets. 3. C) The Net Present Value model meets the cost-benefit criterion. 4. D) A and B

Answer

4.4 (218 Votes)
Verificación de expertos
Tesni Expert · Tutor for 3 years

Answer

D

Explanation

The Net Present Value (NPV) is a financial model that quantifies the profitability of an investment. When using the NPV, both cash inflows and outflows must be factored into the calculations.The NPV model is used to calculate the present value of future cash flows net of the original investment. NPV is used to ascertain the value of a project or investment if it is undertaken. Both assumptions, ‘A’ and ‘B’ exist when we employ NPV strategy. ‘A’ – The cash inflows and outflows are considerable as they give you an approximation of the potential future incoming earnings and the outlay needed. ‘B’ denotes perfect capital markets that negates any form of market imperfections such as taxes, bankruptcy costs, etc. which reflect the reality of it as near perfect simulations. The assumption ‘C’ though correct doesn't mirror a characteristic of it being used within the assumption of NPV model.