Understanding Net Present Value (NPV) in Capital Budgeting

Very Easy Capital Budgeting Investment Decision Criteria

In corporate finance, capital budgeting is a crucial process for evaluating potential investments. It involves determining which projects or investments are worth pursuing based on various criteria. One commonly used investment decision criterion is the Net Present Value (NPV) method. NPV evaluates the profitability of an investment by calculating the present value of expected cash flows and subtracting the initial investment cost.

Given this context, which of the following statements best describes the Net Present Value (NPV) method?

NPV considers the time value of money by discounting future cash flows.

NPV does not account for the initial investment and focuses solely on future cash flows.

NPV is used to compare projects of different scales without adjustments.

Hint

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