Which of the following statements regarding the assumptions underlying discounted cash flow analysis is/are true?
i. All cash flows are treated as though they occur at year-end.
ii. Cash flows associated with the investment project are treated as if they are known with certainty.
iii. The discount rate is always the same as the average cost of capital.

Question

Quizplus · Accepted Answer

Statement i is true as all cash flows are discounted to their present value at year-end. Statement ii is partly true as discounted cash flow analysis assumes that cash flows are known with certainty, but in reality, there is always some level of uncertainty. Statement iii is false as the discount rate used in discounted cash flow analysis can vary depending on the risk associated with the project, and may not necessarily be the same as the average cost of capital.

Which of the Following Statements Regarding the Assumptions Underlying Discounted