Which capital budgeting method is most useful for evaluating the following project? The project has an initial after tax cost of $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?
A) NPV.
B) IRR.
C) Payback.
D) Two of the above.

Question

Quizplus · Accepted Answer

NPV takes into account the time value of money by discounting future cash flows to their present value. It also considers the initial investment cost. In this case, the project has an initial after-tax cost of $5,000,000 and positive cash flows in each year, except for year 2. Therefore, by calculating the NPV, it will give us an idea of whether the project is worthwhile to pursue. The other options, IRR and Payback, do not take into account the time value of money and may not provide an accurate picture of the project's profitability.

Which Capital Budgeting Method Is Most Useful for Evaluating the Following