Question

The ____ approach takes into account both the magnitude and timing of cash flows over the entire life of a project in measuring its economic desirability.

payback period

average rate of return

accounting rate of return

internal rate of return

Answer 1

pay back period - pay back period is the time taken by the project to recover its initial cash out flow. major disadvantage of of pay back period is it does not take into account time value of money . so pay back period is wrong answer

Average rate of return = average net profit / average investment

Average rate of return is the annual percentage return of a project compared to initial investment.it is useful in determining annual percentage return of a project,how ever it does not consider the time value of money.so this is also wrong option.

Accounting rate of return - accounting rate of return , average rate of return both are same.it also does not take in to account time value of money .this is also incorrect answer

Internal rate of return - IRR  is the rate where NPV of project is 0.i.e, net present values of all cash flows equal to zero. IRR method takes in to account both magnitude and timing of cash flows over the entire life of a project in measuring its economic desirability. so it is correct option