Answer (A) is correct . The net present value method discounts future cash flows to the present value using some arbitrary rate of return, which is presumably the firm’s cost of capital. The initial cost of the project is then deducted from the present value. If the present value of the future cash flows exceeds the cost, the investment is considered to be acceptable.
Answer (B) is incorrect because The payback method does not recognize the time value of money.
Answer (C) is incorrect because The?average rate of return method does not use the firm’s cost of capital as a discount rate.
Answer (D) is incorrect because The accounting rate of return method does not recognize the time value of money.
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