What Is the Limitation of Using the Net Present Value

question 12

Multiple Choice

What is the limitation of using the net present value for evaluating capital investment alternatives?

• A) Ignores the time value of money
• B) Does not consider cash flows
• C) Cannot be used to compare projects of different size
• D) All of the above are limitations of the net present value method.

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Definitions:

T-bills

Short-term government securities with maturity periods typically less than a year, used as a financial instrument to manage short-term liquidity.

Simple Interest

Interest calculated only on the principal amount, not on accumulated interest.

Discount Rate

The discount rate applied in the evaluation of discounted cash flow to ascertain the current worth of anticipated future cash flows.

Promissory Note

A fiscal agreement in which one side promises in writing to pay a fixed amount of cash to the other side, either immediately when demanded or on a future agreed date.