Question

Which of the following ways to evaluate profitability deal with discounted cash flow techniques?

1. Internal Rate of Return (IRR)
2. Net Present Value (NPV)
3. Accounting Rate of Return (ARR)
4. a and b
5. All of the above

Answer 1

Correct answer-----------(d) a and b

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Both Internal rate of return and Net present value use discounted cash flow and further ascertain whether an investment is acceptable or not.

In IRR, if the actual rate of return is more than IRR then investment is accepted otherwise not.

In case of Net present value the present value of cash flow is calculated by an appropriate rate of return (usually desired return rate) and after deducting initial investment we get net present value. If NPV is positive the investment is accepted otherwise not.

Accounting rate of return do not use discounted cash flows and neglects the time value of money.