Superior analytical techniques such as NPV used in combinati

Superior analytical techniques, such as NPV, used in combination with risk-adjusted cost of capital estimates, can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions for capital budgeting projects. True False

Solution

The correct answer is True

Explanation:- Risk adjusted cost of capital estimate results in an accurate estimate of the NPV of the cash flows as it discounts the cash flows that are poorly estimated at a higher discount rate when the cash flows are uncertain. When the cash flow uncertainity is less, the risk adjusted cost of capital estimate discounts the cash flows at a lower discount rate. Thus by discounting the cash flows at a higher or lower discount rate depending upon whether the cash flows are uncertain or certain, we can estimate an accurate value of NPV.