If firm's objective is to maximize wealth,
A) the rule of the Profitability Index will always give you the correct answer.
B) the rule of the Net Present Value will always give you the correct answer.
C) the rule of the Payback Period will always give you the correct answer.
D) the rule of the Internal Rate of Return will always give you the correct answer.

Question

Quizplus · Accepted Answer

The objective of maximizing wealth aligns with the goal of maximizing the net present value (NPV) of an investment, which is the difference between the present value of expected cash inflows and the present value of expected cash outflows. Therefore, the rule of the NPV will always give the correct answer in choosing the best investment option that maximizes the firm's wealth. The Profitability Index (A) is a useful tool for ranking projects, but it does not consider the scale of investments. The Payback Period (C) measures how long it takes for the initial investment to be recovered but does not take into account the time value of money. The Internal Rate of Return (D) measures the rate of return on an investment, but it may not always result in the best decision in terms of maximizing wealth.

If Firm's Objective Is to Maximize Wealth