1) Net present value and the payback period are examples of discounted cash flow models used in capital budgeting decisions.
2) In calculating the net present value of an investment in equipment, the required investment and its terminal residual value should be subtracted from the present value of all future cash inflows.
3) The profitability index equals the present value of net cash inflows from the investment divided by the cost of the investment.
4) The residual value is NOT considered in a NPV computation.
5) A series of equal payments or deposits made at equal time intervals are called annuities.
6) The interest rate that makes the net present value of the investment equal to zero is the internal rate of return.
7) The internal rate of return is used as the discount rate when calculating the net present value of a project.
8) The net present value method assumes that all cash inflows are immediately reinvested at a rate of return equal to the internal rate of return.
9) When evaluating capital investment projects, if the internal rate of return is less than the required rate of return, the project will be rejected.
10) When selecting a capital investment project from three alternatives, the project with the highest net present value will always be preferable.