Answer (A) is correct . The rate used to discount future cash flows is sometimes called the cost of capital, the discount rate, the cutoff rate, or the hurdle rate. A risk-free rate is the rate available on risk-free investments such as government bonds. The risk-free rate is not equivalent to the cost of capital because the latter must incorporate a risk premium.
Answer (B) is incorrect because The rate used under the NPV method is the company’s cost of capital.
Answer (C) is incorrect because The NPV method discounts future cash flows to their present values.
Answer (D) is incorrect because The cost of capital is often called a cutoff rate. Investments yielding less than the cost of capital should not be made.
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