Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?
A) Accounting rate of return.
B) Net present value.
C) Payback period.
D) Cash flow method.
E) Return on average investment.

Question

Quizplus · Accepted Answer

Net present value (NPV) considers the time value of money by discounting all future cash flows generated by the investment to their present value using a discount rate. This method then subtracts the initial investment cost from the present value of the cash inflows to determine the investment's net present value. The higher the NPV, the more desirable the investment. Accounting rate of return, payback period, and return on average investment do not fully consider the time value of money. The cash flow method is a broad category that can include techniques that do or do not consider the time value of money.

Which One of the Following Methods Considers the Time Value