Which capital budgeting technique is best suited for evaluating projects of unequal duration? A. Payback Period B. Net Present Value (NPV) C. Internal Rate of Return (IRR) D. Profitability Index (PI)
Question
Which capital budgeting technique is best suited for evaluating projects of unequal duration? A. Payback Period B. Net Present Value (NPV) C. Internal Rate of Return (IRR) D. Profitability Index (PI)
Solution
The best capital budgeting technique for evaluating projects of unequal duration is B. Net Present Value (NPV).
Here's why:
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Payback Period (A) is not suitable because it does not take into account the time value of money or cash flows beyond the payback period. It also does not consider the project's duration.
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Internal Rate of Return (C) can be misleading when comparing projects of unequal life spans. It assumes that the cash inflows from the project are reinvested at the IRR itself, which may not always be practical.
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Profitability Index (D) is a relative measure and may not provide the absolute value that NPV does.
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Net Present Value (B) is the most appropriate method because it considers the time value of money, all the cash flows during the project's life, and provides an absolute measure of the project's value. It can handle projects of different lengths and sizes, making it the best choice for evaluating projects of unequal duration.
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