The amount by which a project increases the value of the firm is given by which of the following? A. The project's accounting rate of returnB. The project's net present value (NPV). C. The project's internal rate of return (IRR). D. The project's present value.

Question

Gia Chaney

Business

26 November, 18:17

The amount by which a project increases the value of the firm is given by which of the following? A. The project's accounting rate of returnB. The project's net present value (NPV). C. The project's internal rate of return (IRR). D. The project's present value.

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Answers (1)

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Malone · Answer 1

B. The project's net present value (NPV)

Explanation:

A. The accounting rate of return is computed below:

= Annual net income : average investment

where,

the average investment would be

= (Initial investment + salvage value) : 2

It is used to measure the profitability based on the return after computing it.

B. In this net present value approach, it subtracts the initial investment from the discounted cash inflows of the present value. If the sum is positive than the project, otherwise it is not beneficial to the company.

C. The internal rate of return is the return in which the net present value is zero, meaning that the initial investment is equal to the present value of the annual cash flows after taking into account the discount factor

D. The present value does not give the absolute value about the increasing amount of the project

Above all the explanations, the appropriate answer is B.