ACCA MA · Chapter 11 · Question 9 of 10
Which of the following is an advantage of net present value (NPV) compared with the payback method?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) NPV takes account of all cash flows over the project's life and the time value of money
Explanation
NPV discounts all relevant cash flows over the whole life of the project at the cost of capital, so it allows for the time value of money and measures the increase in shareholder wealth. Payback ignores cash flows after the payback point and, in its basic form, the time value of money.
More Capital budgeting MCQs
- Q1Which of the following is capital expenditure?
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- Q4A loan charges interest of 1.5% per month, compounded monthly. What is the equivalent annual interest rate (to two decimal places)?
- Q5A project costs $100,000 now and will generate cash inflows of $35,000 a year for 4 years, starting one year from now. The cost of capital…