Question

Net Present Value method is related with

• A. Time value of money
• B. Inflated value of money
• C. Present value of money
• D. None of these

Hint:

Remember the names: Net {Present Value}. The name itself tells you the core concept it uses. It is a method of finding the net of the present values of all cash flows.

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
The question asks for the core concept related to the Net Present Value (NPV) method of capital budgeting.
Step 2: Key Formula or Key Concept:
The Net Present Value (NPV) method is a discounted cash flow (DCF) technique. It calculates the difference between the present value of future cash inflows and the present value of cash outflows over a period of time.
The formula is: \[ NPV = \sum_{t=1}^{n} \frac{CF_t}{(1+r)^t} - C_0 \] where:
\(CF_t\) = Cash flow in period t
\(r\) = Discount rate
\(t\) = Time period
\(C_0\) = Initial investment (cash outflow at time 0)
Step 3: Detailed Explanation:
Let's analyze the options:

(A) Time value of money: This is the broad, underlying principle that a sum of money is worth more now than the same sum will be at a future date due to its potential earning capacity. NPV is an application of this principle.

(B) Inflated value of money: This refers to the future value of money, considering inflation. NPV does the opposite; it discounts future values back to the present.

(C) Present value of money: This is the direct concept used in the NPV calculation. The method explicitly computes the present value of all future cash flows. While (A) is the parent principle, (C) is the specific concept being applied. Given the options, "Present value of money" is the most direct and accurate description of what the NPV method is related to.

Step 4: Final Answer:
The NPV method is directly related to calculating the Present Value of money. The answer key points to (C), which is the most specific and correct answer.