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When evaluating a capital budgeting decision, which of the following evaluation tools would incorporate the time...

  1. When evaluating a capital budgeting decision, which of the following evaluation tools would incorporate the time value of money?

    Payback method

    IRR

    EVA

    RI
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Answer #1

While evaluating capital budgeting decision, IRR(Internal Rate of Return) incorporates the time value of money as while calculating IRR, one would have to set NPV = 0 and NPV needs discounting of cash flows that include time value of money.

Payback period disregards the time value of money, it simply calculates the period to recover the funds.

Similarly, ROI and EVA formulae do not incorporate time value of money, they simply calculate the actual return, not discounted return.

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