The net present value method of evaluating proposed investments

Question

Quizplus · Accepted Answer

The net present value (NPV) method calculates the present value of all expected cash inflows and outflows of a project and deducts the initial investment. The discount rate used in this calculation is usually the minimum desired rate of return or the cost of capital. Therefore, option B is correct. Options A and C are incorrect because the NPV method takes into account all cash flows, not just those within a specific period and it provides a measure of the project's profitability rather than its rate of return. Option D is also incorrect because the NPV method can be used to evaluate both mutually exclusive and independent investment proposals.

The Net Present Value Method of Evaluating Proposed Investments