Question

Please explain why the net present value (NPV) method is preferred over the payback method when evaluating alternative capital budgeting projects.​

Answer 1

There are many capital budgeting techniques though NET PRESENT VALUE is the best method because NPV gives importance to the time value of money

It determines how much cash will flow in as a result of the investment,and compares that against the cash that will flow out in order to make the investment .since these flows take place over time,and often the investment will pay off much later,the present and future value of money is also taken into account.

It gives high priority to the profitability and risk of the project,it also assume cash flow will be reinvested near or at the project's current cost of capital.

the payback period method focuses on payback period .the payback period is the length of the time that it takes for a project to recope its initial cost out of its cash receipt that it generates.the PBP method is not a true measure of profitability of an investment.it does not consider time value of money,it ignores cash flow beyond PBP.