Question
Question 2 Which of the following is an advantage of the NPV method: 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. Its calculation is based on estimates for the required rate of return.
Answer
4
(320 Votes)
Meryl
Professional · Tutor for 6 years
Answer
The correct option according to the above examination of choices is 'A' - The NPV method emphasizes on the time value for money.
Explanation
## Step 1: Firstly, let's understand each of the potential answers, their meanings and contexts. ## Step 2: a) The Net Present Value (NPV) indeed emphasizes the time value of money. It accounts for the concept that a dollar today is worth more than a dollar in the future due to its potential earning power. ## Step 3: b) NPV is not biased against long-term projects. In contrast, the NPV method attempts to measure the profitability of an investment considering its entire life cycle; short-term or long-term, hence this is not an advantage of the NPV method. ## Step 4: c) This choice represents the payback period method feature, which is different from the NPV method. The Payback period method only considers cash flows until a certain point - the cut-off point being the point where the initial investment is fully returned. This is not related to the advantages of using NPV.## Step 5: d) The calculations of NPV indeed utilize assumed or estimated values of required rate of return, but it isn’t its advantage, rather it is a necessity. That estimated rate of return, also known as the discount rate, is subject to accuracy and can affect the result of an NPV computation significantly.