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 correct approach in the NPV equation is to use cash flows, not income calculated according to generally accepted accounting principles (GAAP), because NPV focuses on the cash available to shareholders, not accounting profit. Additionally, it is correct that all incremental cash flows should be considered, but the first rule as stated is incorrect.

The Two Cardinal Rules That Financial Analysts Should Follow to Avoid