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Manag., July-2016-Q5

0. Statement–I: The accept-reject approach is adopted generally when a firm has a large amount of funds to invest in several projects at the same time.
Statement–II: Both the NPV and the IRR methods of investment appraisal are based on a discounted cash flow approach.

  • Option : D
  • Explanation : Net Present Value Method: A simple method to accommodate the uncertainty inherent in estimating future cash flows is to adjust the minimum desired rate of return. Discounted Cash Flow (DCF) techniques, which consider the time value of money, were developed to compensate for the weakness of the payback method. Two examples of DCF techniques include (1) the net present value (NPV) method and (2) the internal rate of return (IRR) method.
    NPV is equal to the present value of future net cash flows, discounted at the marginal cost of capital. The approach calls for finding the present value of cash inflows and cash outflows, discounted at the project’s cost of capital, and adding these discounted cash flows to give the project’s NPV. The rationale for the NPV method is that the value of a firm is the sum of the values of its parts.
    NPV = (After-tax cash flows) × (Present value of annuity) – (Initial investment).
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