3. Using the Net Present Value method of capital budgeting will always lead you

Question

3. Using the Net Present Value method of capital budgeting will always lead you to the economically correct decision because_____, however it can be misleading when comparing projects of ____.

a. NPV represents the change in shareholder wealth that accompanies the acceptance of an investment ; differing size

b. NPV considers the time value of money; differing payback periods

c. NPV considers the time value of money; differing size

d. NPV can be greater than, equal to, or less than zero; differing payback periods

Pick best answer to fill in the blanks.

Explanation / Answer

The NPV method gives the net excess of PV of cash flows over the investment value and it is an absolute value. However , different projects with different size of investment will have different NPV and comparing only on the basis of NPV value without comparing the size may be misleading as the return on investment is not considered.

NPV considers time value of money so the effect of payback period is included in the discounted PV.

Therefore statment c. NPV considers the time value of money; differing size best fill the blanks.

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