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NEW QUESTION: 1
Which of the following statements is most correct?
A. All of these statements are correct.
B. In comparing mutually exclusive projects with unequal lives, you should always choose the project which has the highest NPV.
C. For comparing mutually exclusive projects with unequal lives, replacement chain analysis leads to the same decision as obtained by calculating the equivalent annual annuity (EAA).
D. The rate of depreciation affects accounting statements, but has no effect on the firm's capital budgeting decisions.
E. Generally, we do not need to adjust project cash flows to take into account the effects of inflation, since inflation is not accounted for in the cost of capital.
The replacement chain analysis and the equivalent annual annuity methods lead to the same decision.
Depreciation affects a firm's cash flow, which affects its capital budgeting decisions. The project with the highest extended NPV should be chosen. The cost of capital reflects inflation; therefore, project cash flows must be adjusted for inflation.