Question

Which of the following best explains why the net present value method of capital budgeting is...

Which of the following best explains why the net present value method of capital budgeting is preferred over the internal

rate−of−return ​method?

.

the net present value method is expressed as a percentage of initial investment

B.

the calculation under the net present value method is easy as it does not use time value of money

C.

the percentage return computed under the net present value method is very easy to compare

D.

the net present values of individual projects can be added to determine the effects of accepting a combination of projects

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Homework Answers

Answer #1

Answer:

Option D: The NPVs of individual projects can be added to determine the effects of accepting a combination of projects

Explanatrion:

Net Present Value (NPV) refers to difference of present value of cash inflows and present values of cash outflows.

Following points are relevant in regard to NPV:

  • NPV is calculated in amounts and not as a percentage.
  • NPV uses time value of money just as Internal Rate of Return (IRR).
  • NPV does not calculate any percentage return. Insted it shows the net benefit of the investment in amounts.
  • IN case of more than one projects, NPV of individual projects can be added to determine the effect of accepting all projects combined. This can't be done in IRR.

Hence,

Option 'D' is correct and rest all are incorrect.

In case of any doubt or clarification, feel free to come back via comments.

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