Question

which of the following investment rules does not use the time value of the money concept?

a.) the payback period

b.) all of the options use the time value concept

c.) internal rate of return

d.) net present value

Answer 1

Time value of money is the concept which says that $1 is worth more today than tomorrow.

Money has self earning capacity in form of an interest.

There are various methods of capital budgeting which helps in determining whther project should be accepted or not.

1) Correct

Payback period determines within how many years initialy invested amount will be covered back in form of cash inflows

pay back period = Initial investment/ cash flow per year

Thus, it does not discount cash flows and fails to take into account time value of money

2) Incorrect

Payback period, accountign rate of return are two methods that ignores time value of money

3)Incorrect

IRR is the rate at which npv= 0. it discounts the cash flow to find IRR.

Thus, it considers time value of money

4) Incorrect

NPV = -initial outlay+present value of cash flows

future cash flows are discounted to find present value thus it takes into account time value of money

Answer A)