Question

Companies use capital investment analysis to evaluate long-term investments. Capital investment evaluation methods that use present values are (1) Net present value method (NPV) and (2) Internal rate of return (IRR) method.

Methods That Use Present Values Of the two capital investment evaluation methods, a defining characteristic NPV and IRR is that they the time value of money. This means that money tomorrow is worth money today. And, that cash invested today has the potential to earn income and in value over time.

When making an investment decision between two mutually exclusive projects, the project with the greatest return on investment should be chosen.
TRUE
FALSE

Answer 1

The use of NPV and IRR methods in capital investment evaluation considers the time value of money, and the project with the higher NPV should be chosen over simply the greatest return on investment, which is not always the same.

Step-by-step explanation:

Within capital investment analysis, both the Net Present Value (NPV) and Internal Rate of Return (IRR) methods incorporate the concept of the time value of money, which acknowledges that a dollar today is worth more than a dollar tomorrow due to its potential to earn income. The statement 'When making an investment decision between two mutually exclusive projects, the project with the greatest return on investment should be chosen' is FALSE. This is because the project with the higher NPV should be selected, which may not always coincide with the highest return on investment. NPV and IRR help in assessing these values by comparing present costs to the present discounted value of future benefits, which is a crucial tool in various decisions, including environmental policies, government projects, and financial markets.