ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal
Which of the following is an advantage of the net present value method of investment appraisal compared with the payback method?
NPV takes account of all cash flows over the project's life, including those after the payback point, and discounts them for the time value of money. Payback ignores later flows, while simplicity and percentage results are features of payback and IRR respectively.
- AIt is simpler to calculate and explain to managers
- BIt takes account of cash flows arising after the payback pointCorrect
- CIt ignores the time value of money
- DIt gives the result as a percentage return
Explanation
NPV considers all cash flows over the project life and discounts them, so later cash flows are included. Payback ignores flows after the cut-off. Simplicity favours payback, and a percentage result is the IRR, not NPV.
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