Question

Which of the following capital budgeting techniques employ some sort of arbitrary value against which the project measurement must be compared when determining whether to accept or reject a project?

I. Net present value
II. Average accounting return
III. Profitability index
IV. Discounted payback
A) II and IV only
B) II, III, and IV only
C) I and II only
D) I, II, and IV only
E) I, III, and IV only

Answer 1

Net present value (NPV), average accounting return, and discounted payback are capital budgeting techniques that employ some sort of arbitrary value against which the project measurement must be compared.

Step-by-step explanation:

The capital budgeting techniques that employ some sort of arbitrary value against which the project measurement must be compared when determining whether to accept or reject a project are:

1. Net present value (NPV): NPV compares the present value of cash inflows and outflows associated with a project. If the NPV is positive, the project is accepted; if it is negative, the project should be rejected.
2. Average accounting return: This technique compares the average net income generated by a project to the average book value of the investment. A predetermined minimum threshold is set, and if the average accounting return is greater than the threshold, the project is accepted.
3. Discounted payback: Discounted payback calculates the time required for a project to recover its initial investment, taking into account the time value of money. If the discounted payback period is less than a specified set period, the project is accepted.