When using IRR, NPV, or PI in capital budgeting:
A. accounting measures of profit are considered.
B. mutually exclusive projects are always ranked the same.
C. the time value of money is taken into account.
D. the method is simple and decisions are intuitive.
E. direct estimates of the increase or decrease in shareholder value can be obtained.
Capital Budgeting Techniques:
In capital budgeting, there are various methods that are used to determine the profitability of a project. A good capital budgeting technique should have the following characteristics;
- Should consider the time value of money.
- Should have a clear decision criterion that allows easy decision making.
- All cash flows should be taken into account.
- During the analysis of project cashflow should be used instead of accounting profits.
Answer and Explanation:
The answer is C. the time value of money is taken into account.
IRR, NPV, and the profitability index are all referred to as discounted methods of capital budgeting. This means that they consider the value of cash flow. Commonly the decision of whether to invest in a project or not is mainly done before the project commences and thus the value of cash flow must be determined to know whether investing in a project is profitable or not.
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from Accounting 102: Intro to Managerial AccountingChapter 8 / Lesson 4