Why Are the Net Present Value and Internal Rate of Return

question 97

Multiple Choice

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.

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Definitions:

NPV

Net Present Value; a method used in capital budgeting to evaluate the profitability of an investment or project, comparing the value of all cash inflows and outflows over time, discounted back to their present value.

Indirect Bankruptcy Costs

The costs associated with bankruptcy that are not directly related to legal or administrative expenses, such as lost sales, customers, or suppliers.

Financial Leverage

Employing debt to boost the potential earnings from an investment.

Debt-Equity Ratio

A ratio illustrating the financial strategy of using debt versus equity in asset financing for a company.