Multiple Choice
Which of the following are the two most common types of interest used in time value of money calculations?
17
views
10. Time Value of Money
Time Value of Money Equations
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following methods for evaluating a capital investment project ignores the time value of money?
A
Discounted Payback Period
B
Net Present Value (NPV)
C
Payback Period
D
Internal Rate of Return (IRR)
Verified step by step guidance1
Understand the concept of time value of money: The time value of money is the principle that a dollar today is worth more than a dollar in the future due to its potential earning capacity. Methods that consider this principle discount future cash flows to their present value.
Review the Payback Period method: The Payback Period calculates the time it takes for an investment to recover its initial cost from cash inflows. It does not discount future cash flows, meaning it ignores the time value of money.
Compare with other methods: Discounted Payback Period, Net Present Value (NPV), and Internal Rate of Return (IRR) all incorporate the time value of money by discounting future cash flows to their present value.
Identify the key difference: The Payback Period method is unique among the listed methods because it evaluates cash flows without adjusting for the time value of money, making it less accurate for long-term projects.
Conclude the answer: Based on the explanation, the Payback Period method is the correct answer as it ignores the time value of money.
5:55mWatch next
Master Time Value of Money and Using Timelines with a bite sized video explanation from Brian
Start learningRelated Videos
Related Practice
Time Value of Money Equations practice set
Problem sets built by lead tutorsExpert video explanations