Chapter 11, Problem 1MCQ

To determine

Investment decision:

Investment decision can be referred to as capital budgeting. It involves finding solutions to questions like whether to add to capital assets today will increase the revenues of tomorrow to cover costs.

To identify: The correct statement from the given statements.

Answer to Problem 1MCQ

Solution:

Option a.

Hurdle rate of return.

Explanation of Solution

Option a.

Hurdle rate of return can be referred to as a minimum rate that the corporation expects while investing in a particular project. It is also known as target rate.

Hence, option (a) is correct.

Option b.

Payback period is a type of capital budgeting technique which describes the number of year or length of time needed for proposal‘s cumulative cash inflow to be equal to its cash outflow.

Hence, option (b) is not correct.

Option c.

Internal rate of return can be defined as a metric applied used to measure the profitability of potential investment. It is a discount rate which makes net present value of all cash flow equals to zero.

Hence, option (c) is not correct.

Option d.

The average rate of return is a type of capital budgeting technique which is based on accounting principle of return on investment. It is the annualized net income earned on the average funds invested.

Hence, option (d) is not correct.

Option e.

Maximum rate of return is the maximum proportion of return a corporation expects from the project. This rate is generally always beyond the estimated targets.

Hence, option (e) is not correct.

Conclusion

Hence, it can be concluded that the minimum acceptable rate of return for an investment decision is the hurdle rate of return. Therefore, option (a) is correct.