Question

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

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.**

1) Capital budgeting is the process of analyzing potential
projects. What does net present value (NPV) represent in capital
budgeting analysis? How does NPV compare to internal rate of return
(IRR); specifically, what makes them similar and different? What
functional flaw exists in the discounted payback period calculation
that makes this capital budgeting tool suspect?

When applying the concept of present value to capital budgeting
decisions, which of the following statements is TRUE?
Question 28 options:
Internal rate of return cannot be computed when cash flows are
unequal year to year
A project with a higher IRR will be preferable over one with a
lower IRR.
A positive NPV means that a project earns less than the cost of
capital on a project.
Residual value is not included in the calculation of Net Present
Value.

1.What is the limitation of using the net present value for
evaluating capital investment alternatives?
a. Ignores the time value of money
b. Does not consider cash flows
c. Cannot be used to compare projects of different size
d. All of the above are limitations of the net present value
method.
2.Which of the following is NOT part of the capital budgeting
process?
a.Project identification
b.Project evaluation
c.Project monitoring
d.All of the above are parts of the capital budgeting
process.

Capital Budgeting Decision Criteria: NPV
NPV
The net present value (NPV) method estimates how much a
potential project will contribute to -Select-business
ethicsshareholders' wealthemployee benefitsCorrect 1 of Item 1, and
it is the best selection criterion. The
-Select-smallerlargerCorrect 2 of Item 1 the NPV, the more value
the project adds; and added value means a
-Select-higherlowerCorrect 3 of Item 1 stock price. In equation
form, the NPV is defined as:
CFt is the expected cash flow in Period t, r...

Which one of the following statements is correct? Net present
value is equal to an investment's cash inflows discounted to
today's dollars. The net present value is positive when the
required return exceeds the internal rate of return. The net
present value is a measure of profits expressed in today's dollars.
If the internal rate of return equals the required
return, the net present value will equal
zero. If the initial cost of a project is increased, the
net present...

2. Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider the case of Lumbering Ox Truckmakers:
Suppose Lumbering Ox Truckmakers is evaluating a proposed
capital budgeting project (project Alpha) that will require an
initial investment of $400,000. The project is expected to generate
the following net cash flows:
Year
Cash Flow
Year 1
$375,000...

1. Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Black Sheep Broadcasting Company is evaluating a
proposed capital budgeting project (project Alpha) that will
require an initial investment of $450,000. The project is expected
to generate the following net cash flows:
Year
Cash Flow
Year 1
$275,000
Year 2
$500,000...

1. Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Happy Dog Soap Company is evaluating a proposed capital
budgeting project (project Alpha) that will require an initial
investment of $450,000. The project is expected to generate the
following net cash flows:
Year
Cash Flow
Year 1
$375,000
Year 2
$425,000...

Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Hungry Whale Electronics is evaluating a proposed
capital budgeting project (project Alpha) that will require an
initial investment of $400,000. The project is expected to generate
the following net cash flows:
Year
Cash Flow
Year 1
$325,000
Year 2
$400,000
Year 3...

1. Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Happy Dog Soap Company is evaluating a proposed capital
budgeting project (project Alpha) that will require an initial
investment of $400,000. The project is expected to generate the
following net cash flows:
Year
Cash Flow
Year 1
$375,000
Year 2
$400,000...

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