The capital budgeting method that recognises the time value of money by discounting cash flows over the life of the project, using the company's required rate of return as the discount rate is called the
A)simple rate of return method.
B)the net present value method.
C)the internal rate of return method.
D)the payback methoD.

Question

Quizplus · Accepted Answer

The net present value method recognises the time value of money and discounts cash flows using the required rate of return as the discount rate. This method considers all cash inflows and outflows over the life of the project, unlike the payback method which only considers the time it takes to recover the initial investment. The internal rate of return method also considers the time value of money but assumes that all cash flows are reinvested at the same rate, which may not be a realistic assumption. The simple rate of return method only considers the average annual income and the initial investment and does not consider the time value of money.

The Capital Budgeting Method That Recognises the Time Value of Money