Which of the following are merits of NPV method of capital budgeting? Considers all cash flows.…
The Net Present Value (NPV) method of capital budgeting considers all cash flows over the entire life of the project (A), accounts for the time value of money by discounting…
Choose your answer
Which of the following are merits of NPV method of capital budgeting?
- Considers all cash flows.
- Consider the time value of money.
- Give more weightage to future receipt.
- Satisfies the value additivity principle.
- No relation with the wealth maximisation principle.
Answer and explanation
Correct answer D
The Net Present Value (NPV) method of capital budgeting considers all cash flows over the entire life of the project (A), accounts for the time value of money by discounting cash flows (B), and satisfies the value additivity principle (NPV(A+B) = NPV(A) + NPV(B)) (D). It gives greater weight to earlier receipts rather than distant future receipts and is directly aligned with wealth maximization, making A, B, D only correct.
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UGC NET Commerce