Question

The capital budgeting method which calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return is the:
a. payback method
b. accrual accounting rate-of-return method
c. sensitivity method
d. net present value method

Answer 1

Answer:

d. net present value method

Explanation:

There are various methods in capital budgeting:

1. Payback period: It refers to the period in which the initial investment amount should be recovered. It is denoted in years

2. Accrual accounting rate-of-return method: In this method, the recording of the transactions should be done based on an accrual basis which means whether the amount is received or not but it is recorded in the books of accounts.

3. Sensitivity method is not covered under capital budgeting method

4. Net present value method: In this method, the initial investment is subtracted from the discounted present value cash inflows. If the amount comes in positive than the project is beneficial for the company otherwise not.

So, the option d is correct.