Question
In the net present value method of investment appraisal, which of the following is NOT a relevant cashflow in the calculation of NPV: The cost paid on researching the investment opportunity. The estimated cost of initial investment in the project None of the options. The profits estimated to be generated during the project's life.
Answer
4.4
(216 Votes)
Alexandra
Elite · Tutor for 8 years
Answer
None of the options.
Explanation
## Step 1: Understanding NPVIn the net present value (NPV) method of investment appraisal, we consider all cash inflows and outflows related to an investment project. These cash flows typically include costs incurred in the early stages, the capital outlay required for starting the project, and future cash inflows in the form of revenues or savings.## Step 2: Identifying Relevant Cash FlowsThe cost paid in researching the investment opportunity is a cash outflow. Similarly, the estimated cost of initial investment in the project is a cash outflow, while the estimated profits are cash inflows. However, it is crucial to note that all options in the problem represent relevant cash flows in the calculation of NPV.## Step 3: Identifying Irrelevant Cash FlowsOn the contrary, there is no option that represents a value or cost that would not be taken into account in the form of a cash inflow or outflow when calculating NPVS.