In capital budgeting analysis, why is Net Present Value (NPV) generally preferred over the simple Payback Period method?
Answer and explanation
Correct answer: B. NPV accounts for the time value of money and all cash flows throughout the project's entire lifespan
- Step 1: Net Present Value discounts every projected future cash flow to present value using an appropriate cost of capital, whereas the payback period method ignores the time value of money and ignores all cash flows occurring after the payback cutoff. Answer: NPV accounts for the time value of money and all cash flows throughout the project's entire lifespan. Why not the others: NPV requires discounting calculations, directly incorporates interest rates, and cannot eliminate real operational business risks.
Practise more Microeconomics, Business Operations, Financial Management and the Macroeconomic Environment.
Free questions with an explanation for every one, and full timed Poklicna matura (Vocational Matura Slovenia) mock tests.
More Microeconomics, Business Operations, Financial Management and the Macroeconomic Environment questions
- In microeconomics, what fundamental economic concept describes the value of the next best alternative forgone when making a decision?
- In market analysis, what effect does an increase in the market price of a normal good generally have on consumer demand, ceteris paribus?
- In microeconomic theory, what is the term for a market structure characterized by a single seller supplying a unique product with no close s…
- In business production, which of the following is classified as a fixed cost in the short run?
- In price elasticity analysis, what does a price elasticity of demand coefficient with an absolute value greater than one (|Ed| > 1) indicate…
- In economic analysis, at what point is market equilibrium achieved in a competitive market for consumer goods?