The two cardinal rules that financial analysts should follow to avoid capital budgeting errors are: (1) in the NPV equation, the numerator should use income calculated in accordance with generally accepted accounting principles, and (2) all incremental cash flows should be considered when making accept/reject decisions.

Question

Quizplus · Accepted Answer

The first rule is incorrect because in the NPV (Net Present Value) equation, the numerator should use cash flows, not income calculated in accordance with generally accepted accounting principles (GAAP). The second rule is correct, as all incremental cash flows should indeed be considered in making accept/reject decisions.

The Two Cardinal Rules That Financial Analysts Should Follow to Avoid