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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.

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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.

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.

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MerylProfessional · Tutor for 6 years

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The correct option according to the above examination of choices is 'A' - The NPV method emphasizes on the time value for money.

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## Step 1: <br />Firstly, let's understand each of the potential answers, their meanings and contexts. <br /><br />## Step 2: <br />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. <br /><br />## Step 3: <br />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. <br /><br />## Step 4: <br />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.<br /><br />## Step 5: <br />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.
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