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ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal

Which statement about methods of investment appraisal is correct?

The net present value method is correct because it sums all discounted cash flows and so gives the expected increase in wealth in money terms. IRR gives a percentage, ARR uses undiscounted accounting profits, and payback ignores cash flows arising after the payback period.

  1. AThe internal rate of return method states the absolute increase in wealth in monetary terms
  2. BThe accounting rate of return method discounts profits at the cost of capital
  3. CThe net present value method measures the expected increase in wealth in absolute monetary termsCorrect
  4. DThe payback method considers all cash flows over the life of the project

Explanation

NPV is the sum of discounted cash flows, so it shows the monetary change in shareholder wealth. IRR is a percentage, ARR is based on accounting profits without discounting, and payback ignores cash flows after the payback point.

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