The capital budgeting method which calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return is the ________.
A) payback method
B) accrual accounting rate-of-return method
C) sensitivity method
D) net present value method

Question

Quizplus · Accepted Answer

The net present value (NPV) method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return. It is considered one of the most reliable capital budgeting techniques as it takes into consideration the time value of money and provides a clear picture of the profitability of a project. The payback method only considers the time required to recoup the initial investment, while the accrual accounting rate-of-return method uses accrual accounting measures which may not accurately reflect the cash flows of the project. The sensitivity method analyzes the impact of possible changes in key variables, but does not provide a definitive measure of the project's profitability.

The Capital Budgeting Method Which Calculates the Expected Monetary Gain