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Which of the following statements about capital budgeting decision methods is most correct? NPV is superior...

Which of the following statements about capital budgeting decision methods is most correct?

  • NPV is superior since it is the most conceptually correct method.
  • IRR is superior since it measures the rate of return on a capital investment.
  • PI is superior since it measures the present value benefit per dollar of capital invested.
  • PB is superior since it is quick and easy to use and understand.
  • None of the three methods is considered superior to the others.
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Answer #1

The correct option is A

Net Present value is considered as superior method, It is used to estimate the net value that the project is adding, to calculate we discount the future cash flows using the cost of capital and then deduct the initial investment to arrive at the Net present value, It is considered superior because it consider the time value of money into account which Payback period fails to estimate and It assumes that the cash flows are reinvested at the Cost of capital itself which IRR fails to consider and the Profitability index of two projects can be same and there can be huge difference in actual per dollar return, Therefore, The Net present value is consider Most superior technique.

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