Question：Which two of the following statements about capital project evaluation are correct?
A. The discount rate for evaluating capital investments should be determined by prevailing rates of return in the capital markets.
B. Cash flows are discounted for two basic reasons: (1) because $1 today is worth more than $1 tomorrow, and (2) because a risky $1 is worth more than a safe $1.
C. Public companies that invest in projects with a positive net present value will serve the best interests of all their shareholders, even if using cash for current investments prevents the payment of dividends.
D. The weighted average cost of capital should not be used in capital project evaluation by a geared firm.
The correct answers are:The discount rate for evaluating capital investments should be determined by prevailing rates of return in the capital markets; and Public companies that invest in projects with a positive net present value will serve the best interests of all their shareholders, even if using cash for current investments prevents the payment of dividends.
解析：Firstly, prevailing rates of return in the capital markets indicate the opportunity cost of funds.
If managers invest in projects with positive NPVs, so as to increase the expected market value of the company, all shareholders will benefit, regardless of their personal wealth and preferences for income or capital gains. The capital markets allow investors to buy and sell inventories in accordance with their personal preferences for cash flows.
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