Question

1. Which of the following statements is INCORRECT regarding capital budgeting tools?
   1. If the NPV is positive, the Profitability Index must be greater than 1.
   2. If the IRR is greater than the required return, then the NPV will be positive.
   3. The discounted payback period will always be smaller than the payback period.
   4. The NPV is the best capital budgeting tool, as a general rule.

Answer 1

c.The discounted payback period will always be smaller than the payback period.

Discounted payback period will always be longer thant the payback period.

SInce the discounted cash flows will be smaller than the undiscounted cashflows, the discouted payback period will be longer than the simple payback period.

IF NPV is positive PI will be greater than 1.

If IRR is greater than the required return then the NPV will be positive.

The NPV is most preferred capital budgeting tool, as a general rule.