Which method for evaluating capital investment proposals reduces the present value of cash outflows from the present value of cash inflows?

Question

Quizplus · Accepted Answer

The net present value (NPV) method calculates the present value of the expected cash inflows from a capital investment proposal and subtracts the present value of the expected cash outflows. If the resulting NPV is positive, the investment is expected to generate a return that exceeds the required rate of return, and therefore may be accepted. If the NPV is negative, the investment is expected to generate a return that is less than the required rate, and therefore should be rejected. The Payback method and unadjusted rate of return only focus on the payback period and accounting profits and do not take into account the time value of money. Internal rate of return (IRR) method is based on the assumption that the cash inflows generated by the investment will be re-invested at the same IRR, which may not always be the case, making NPV a more reliable capital investment evaluation method.

Which Method for Evaluating Capital Investment Proposals Reduces the Present