Question

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 project’s rate of return, while internal rate of return (IRR) measures a project’s 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.

Answer 1

Answer is Option E.

Payback is the time time taken to re-earn the invested amount by the future cash inflows.

Option A is incorrect. breakeven analysis is used for capital investment analysis, specifically to determine the amount of cash flows in future.

Option B is incorrect. NPV is dollar return whereas IRR is the rate of return.

Option C is incorrect. There would be some return generated, but that might not be sufficient to cover the cost of capital incurred.

Option D is incorrect. In case of a conflict, NPV should be used a decision making tool.