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
(380 Votes)
Vanessa
Master · Tutor for 5 years
Answer
'1) and 3)' statement is false. The other two statements are truthful. This is just because NPV recognizes the time validity of money and maximizes the return of stockholders while the ARR and payback methods do not.
Explanation
## Step1:To solve this problem, it is important to understand the fundamentals behind each of the methods of investment appraisal being discussed: Accounting Rate of Return (ARR), Payback Period, and Net Present Value (NPV).## Step2:The Accounting Rate of Return (ARR) method focuses mainly on accounting profit and it neglects the cash flows aspects and concept of time value of money. ## Step3:Payback method only considers how long it will take to get the initial investment back, also here, concept of time value for money is neglecting. ## Step4:The Net present value (NPV) method recognizes the current value of expected net cash inflows compared to the investing capital or initial investment which fully considers entity's objective of maximizing shareholders' wealth and is strongly preferred in economic and business communities. ## Step 5: Considering the lack of time value uptake and the foresight of 'investment recovery time' instead of the absolute value rate in ARR noise and shares, and these weaknesses to support this point in statements 1 and 2 is not correct.## Step 6: On the other hand, according to statement 3, actually NPV does fully consider an entity's primary objective of maximizing shareholders' wealth, that is why we see a fault in this statement.