Question

The method which provides correct rankings of mutually exclusive projects, when the firm is not subject to capital rationing.is:

Select one:

A. Net present value

B. Internal rate of return

C. Payback period

D. All of the above

Answer 1

The correct answer for the question is mentioned below :

Correct Answer is option "A" - Net present Value.

Because the Net present value is used for decision making, the difference between the inflows of present values and cashoutflows of present values of cash and in formal of net present values there are certain values to be calculated like net cash in flow during the period, Initial investment , discount rate and time period is mandatory to calculate the NPV and the result is equal to the present value of future net cash flows and if the result is positive, it means there are enough cash flow to pay to the project debts and also a good indicator of profitability and hence used for evaluating ranking of mutually exclusive projects.