Question
Which of the following is an advantage of the NPV method: Its calculation is based on estimates for the required rate of return. It emphasises on the time value for money. It is biased against long-term projects. It only considers the cash flows from a project up until a cut-off point.
Answer
3.2
(260 Votes)
Vesper
Master · Tutor for 5 years
Answer
It emphasises on the time value for money.
Explanation
## Step1: The question presents four different components of the NPV (Net Present Value) method and inquires which one may be viewed as an advantage.## Step2: NPV is an evaluation technique widely utilized in capital budgeting decisions that considers various factors, one of which entails reflecting the current monetary values of future investment commitments. In relation to the options: a. The NPV calculation indeed involves estimates of minimum acceptable rates of return (either a firm's Weighted Average Cost of Capital, or some hurdle rate). However, being based on estimates of expected returns is not specifically an advantage. Providing only the best estimate doesn't guarantee increased accuracy. b. Emphasizing the time value of money is an advantage of the NPV method. It is considered in the computation of NPV, and is one of the reasons why NPV affords a better evaluation of the profitability of future projects, thus indeed an advantage. c. The NPV method is not biased against long-term projects, but rather the opposite. Projects offering delayed payoffs can appear unfavourable if the time value of money is not considered which are not the case for NPV computations. d. Considering only cash flows up to a certain point is not an advantage of the NPV method. Actually, it is often viewed as a limitation since it doesn't consider all cash flows for perpetuity opportunities. As a result, in this case, only option (b) lines up with the fundamental advantages of using the NPV method in capital budgeting decisions i.e., Time Value for Money.