Why are the net present value and internal rate of return methods of capital budgeting superior to the payback method?
A) Because they are easier to implement.
B) Because they consider the time value of money.
C) Because they require less input.
D) Because they reflect the effects of depreciation and income taxes.

Question

Quizplus · Accepted Answer

The net present value and internal rate of return methods of capital budgeting are superior to the payback method because they consider the time value of money. This means that they take into account the fact that money today is worth more than the same amount of money in the future, due to inflation and the opportunity cost of investing that money elsewhere. In contrast, the payback method only looks at how long it takes to recover the initial investment, without considering the time value of money.

Why Are the Net Present Value and Internal Rate of Return