If net present values are used to evaluate two investments that have equal costs and equal total cash flows, the one with more cash flows in the early years has the higher net present value.

Question

Quizplus · Accepted Answer

This statement is true as net present value takes into account the time value of money by discounting future cash flows to their present value. Cash flows received earlier are worth more than those received later, as there is a certain degree of risk associated with receiving cash flows in the future. Therefore, an investment with more cash flows in the early years will have a higher net present value than an investment with the same total cash flows but with a larger proportion of cash flows in later years.

If Net Present Values Are Used to Evaluate Two Investments