CFA Practice Question

CFA Practice Question

Which of the following is most correct?
A. Costs like an entrepreneur's time should be considered in calculating NPV.
B. Suppose a firm finances a project using borrowed money. Then for NPV to be positive we must have the Rate of Return from the project to be less than the Rate of Interest on the borrowed money.
C. If a firm has two mutually exclusive projects (for example, due to limited resources or limited funding) then it should choose the project with the higher IRR.
Explanation: If a firm has two mutually exclusive projects (for example, due to limited resources or limited funding) then it should choose the project with the higher NPV. Higher IRR may still give a lower NPV, for example if the initial investment in one project is different from the other. Costs like an entrepreneur's time are opportunity costs, and should be considered in calculating NPV.

User Contributed Comments 1

User Comment
Mikehuynh Entrepreneur's time, money that owner puts in, salaries that he/she could earn by working for another firm = implicit costs.
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