The accountant of Ronier, Inc., has prepared an analysis of a proposed capital project using discounted cash flow techniques. One manager has question... Accounting MCQs | Accounting MCQs

The accountant of Ronier, Inc., has prepared an analysis of a proposed capital project using discounted cash flow techniques. One manager has questioned the accuracy of the results because the discount factors employed in the analysis have assumed the cash flows occurred at the end of the year when the cash flows actually occurred uniformly throughout each year. The net present value calculated by the accountant will

Not be in error.
Be slightly overstated.
Be unusable for actual decision making.
Be slightly understated but usable.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (D) is correct. The effect of assuming cash flows occur at the end of the year simply understates the present values of the future cash flows; in reality, they probably occur on the average at mid-year.