Question
Which of the following statement(s) is/are false?(Select the correct answer from the options below the statements) (1) ARR (Accounting rate of return) and payback methods offer better approaches to appraising an investment opportunity than NPV (Net present value) (2) NPV (Net present value) offers a better approach to appraising an investment opportunity than ARR (Accounting rate of return)and payback methods (3) NPV (Net present value) does not fully consider an entity's primary objective of maximizing shareholders' wealth (1) and (3) (1) only (1) and (2) (2) and (3)
Answer
4.5
(193 Votes)
Aria
Professional · Tutor for 6 years
Answer
(1) and (3)
Explanation
## Step 1: Evaluate each statement based on the characteristics of each approach:Accounting rate of return (ARR), payback method, and Net present value (NPV) are all tools used to assess the eligibility of an investment. - The ARR and payback methods are simpler: ARR considers an average return over a project’s life while Payback period quantifies the time it takes to regain an original investment.- But NPV provides a superior evaluation. It calculates the total discounted future cash inflows, subtracts the initial cost, and thus shows us the exact profitability of an investment – unlike the Payback period. The calculation of ARR does not consider time cost for the money, while NPV engagingly accounts the time value for money ## Step 2: Assess each endowed statement - given their analyses, to establish their respective correctness:- Statement (1) says that ARR and Payback methods offer better approaches towards appraising an investment opportunity than an NPV – we know this isn't supportable in practical terms owing to what we explored above; because the NPV method gives a comprehensive appraisal by valuing returns concerning the time value of money – hence, Statement (1) is False- Statement (2) says that NPV affords an appropriate approach to appraising various investment opportunities than that of ARR and Payback methods – We established above that this statement is -True- Statement (3), claims that NPV doesn't fully consider the main object maximising shareholders' wealth Full Abbreviations reveals that this also misleading because maximizing NPV also equates to elevating shareholder's Wealth - hence, statement - (3) is False Because we have learned that both statement (1) and statement (3) embody False outcomes, and Statement (2) nurtures the Truth, the correct selection must, therefore, outweigh Statement (1) possibly in conjunction with Statement (3).