Which of the following statements about capital investment a

Which of the following statements about capital investment analysis is most correct?

A - Although a useful accounting concept, breakeven analysis has no role in capital investment analysis.

B - Net present value (NPV) measures a projectÕs rate of return, whereas internal rate of return (IRR) measures a projectÕs dollar return.

C - An NPV of zero indicates that the project is expected to return the amount of the initial investment, but it will not provide a return on that investment.

D - On most projects, the NPV and IRR measures will give conflicting results, so managers must use judgment as to which measure to use.

E - Payback measures the length of time it takes to recover the initial investment in the project.

Solution

The correct choice is E. Payback period is calculated as the time required for a project to return the initial investment. All the other statements are false

Breakeven analysis is not uselful in capital investment anaysis but uselful in operating results analysis

NPV = $ return whereas IRR = % of return

NPV of zero means that project has a return which is exactly equal to the cost of capital

NPV & IRR gives conflicting results but NPV is preferred over IRR not judgement