Which of the following statements comparing the use of NPV with the use of comparables to value a firm is true?

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Quizplus · Accepted Answer

Comparables, like NPV, can be used to estimate a true value for a firm. However, the assumptions and methodology used for each approach may differ. NPV relies on estimating future cash flows and discounting them to present value, while comparables rely on analyzing financial ratios and metrics of similar companies in the industry. Both methods may have limitations and estimation error, but they can provide useful insights into a firm's value. Therefore, neither method is always superior, and the choice of approach depends on the availability of data and the accuracy of underlying assumptions. Comparables can provide estimates of a company's worth based on similar companies or assets, while NPV requires a forecast of future cash flows and a discount rate. However, both methods ultimately seek to estimate the true net present value of a firm, and neither is inherently better than the other. The choice between the two methods will depend on the availability and reliability of data, as well as the specific context of the valuation.

Which of the Following Statements Comparing the Use of NPV