The advantages of NPV are all of the following except: A. it can be used as a rough screening...

Question:

The advantages of NPV are all of the following except:

A. it can be used as a rough screening device to eliminate those projects whose returns do not materialize until later years.

B. it provides the amount by which positive NPV projects will increase the value of the firm.

C. it allows the comparison of benefits and costs in a logical manner through the use of time value of money principles.

D. it recognizes the timing of the benefits resulting from the project.

Net Present Value:

The net present value is a useful metric for helping managers determining the profitability of a project, but requires forecast of cash flows associated with the project. Therefore, this method is more involved and complex than other methods such as the payback period.

Answer and Explanation:

The answer is A).

The NPV is not used as a rough screening deice to eliminate projects whose returns do not materialized until later years. Simple payback period does. The simple payback period is the number of years until a project generates enough cumulative cash flows to cover the initial cost. Unlike the NPV method, the payback period method ignores the time value of money, and thus provides a rough estimate of the returns on the project.


Learn more about this topic:

Loading...
Payback Analysis: Formula & Example

from Introduction to Management: Help and Review

Chapter 16 / Lesson 12
26K

Related to this Question

Explore our homework questions and answers library