ECONOMICS

COST ACCOUNTING

CAPITAL BUDGETING

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

Which of the following capital budgeting techniques ignores time value of money?

A	Internal Rate of Return
B	Payback period
C	Net Present Value
D	Profitability index

Explanation:

Detailed explanation-1: -Unlike other methods of capital budgeting, the payback period ignores the time value of money (TVM). This is the idea that money is worth more today than the same amount in the future because of the earning potential of the present money.

Detailed explanation-2: -Answer and Explanation: The correct answer is option A) Payback.

Detailed explanation-3: -Correct Answer: Option B. Profitability index uses money’s time value concepts as it uses the present value of cash flows in its computations. B. Payback. It doesn’t use money’s time value concepts as it considers annual cash flows and investment costs in its computations.

Detailed explanation-4: -The payback period ignores the time value of money.

Detailed explanation-5: -The specific time value of money calculation used in Capital Budgeting is called net present value (NPV). NPV is the sum of the present value (PV) of each projected cash flow, including the investment, discounted at the weighted average cost of the capital being invested (WACC).

There is 1 question to complete.