Net present value:
A) Cannot be used when deciding between two mutually exclusive projects.
B) Is more useful to decision makers than the internal rate of return when comparing different sized projects.
C) Is easy to explain to non-ﬁnancial managers and thus is the primary method of analysis used by the lowest levels of management.
D) Is computed the same as present value when using excel spreadsheets to analyze a project.
E) Is very similar in its methodology to the average accounting return.

Question

Quizplus · Accepted Answer

Net present value is a method used to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and the present value of cash outflows. It is more useful than the internal rate of return when comparing different sized projects because it takes into account the magnitude of the cash flows. The other options are incorrect as net present value can be used to decide between mutually exclusive projects, may not be easy to explain to non-financial managers, is not computed in the same way as present value, and is not similar to the average accounting return.

Net Present Value