Which of the following methods utilizes discounted cash flows when analyzing potential capital expenditures?
Methods:
1) Accrual accounting rate-of-return
2) Internal Rate of Return (IRR)
3) Payback Period
4) Net Present Value (NPV)
A) 1 only
B) 1 and 2
C) 1 and 3
D) 2 and 4

Question

Quizplus · Accepted Answer

Internal Rate of Return (IRR) and Net Present Value (NPV) are the two methods that utilize discounted cash flows when analyzing potential capital expenditures. IRR calculates the discount rate at which the present value of future cash flows equals the initial investment, while NPV calculates the present value of future cash flows minus the initial investment. Both methods take into account the time value of money and are considered more precise approaches to analyzing potential investments than methods that do not use discounted cash flows. Therefore, the correct choice is D, which includes both IRR and NPV.

Which of the Following Methods Utilizes Discounted Cash Flows When