Question

What alternative investment bases can be used in the accounting rate-of-return approach to capital budgeting?

1) Net present value (NPV)
2) Internal rate of return (IRR)
3) Payback period
4) Profitability index

Answer 1

The alternative investment bases in the accounting rate-of-return approach include NPV, IRR, payback period, and profitability index.

Step-by-step explanation:

In the accounting rate-of-return approach to capital budgeting, there are several alternative investment bases that can be used to make decisions about investing in projects. These include:

1. Net present value (NPV): This method compares the present value of cash inflows to the present value of cash outflows to determine the profitability of an investment.
2. Internal rate of return (IRR): This method calculates the discount rate at which the present value of cash inflows equals the present value of cash outflows, indicating the rate of return for the investment.
3. Payback period: This method calculates the time it takes for the cash inflows from an investment to recover the initial investment.
4. Profitability index: This method compares the present value of cash inflows to the initial investment to determine the profitability of an investment.