Net present value is a highly valued decision-making tool because:
A) It only includes information which is known with certainty.
B) It is computed using the internal rate of return.
C) It can be applied to either independent or mutually exclusive projects.
D) It reveals the rate of return which investors will earn on average over the lifetime of the project.
E) It is affected by the magnitude rather than the timing of a project's cash ﬂows.

Question

Quizplus · Accepted Answer

Net present value (NPV) is a valuable decision-making tool because it measures the difference between the present value of cash inflows and the present value of cash outflows for a project. This means that it takes into account the timing and magnitude of cash flows, making it a more accurate representation of a project's profitability than other tools such as the internal rate of return (B). The fact that NPV can be applied to either independent or mutually exclusive projects (C) adds to its usefulness. Additionally, NPV provides a clear indication of the expected rate of return for investors over the lifetime of the project (D), allowing for better investment decisions. Finally, NPV is not limited to only including information that is certain (A), as it also accounts for potential risks and uncertainties through the use of discount rates. Therefore, the best choice is C.

Net Present Value Is a Highly Valued Decision-Making Tool Because