Question 10 of 10 Time which one of the ollowing is generall

Question 10 (of 10) Time which one of the ollowing is generally considered to be the best form of anatysils f you have to select a single method to anajyze a variety of investment variety of investment opportunities? O Internal rate of return O Profitability index O Payback O Net present value O Accounting rate of return 5 7 9

Solution

Ans. Option 4th Net present value

Explanation:

(1) Ney present value is better than internal rate of return because, in IRR method there is a need to find two discount rates whereas in NPV we require only one so the process of evaluation in IRR is longer than NPV.

(2) Profitability index provide the answer in ratios, so it is not as effective as NPV.

(3) In Payback period method the answer is always in years whereas in NPV the answer is in values so it is easier method to compare between two or more projects.

(4) Accounting rate of return provide the result in percentage not in value or amount so the NPV method is better than ARR.

From the above points it is clear that the Net present value is the best form of analysis.