Question

Profitability calculation method that includes time value of money is:

• A. Payback period
• B. Net return
• C. Rate of return on investment
• D. Net present worth

Hint:

To include time value of money in project evaluation, always use Net Present Worth or Internal Rate of Return — never rely on Payback Period or ROI alone.

Answer 1

The Correct Option is D

The concept of the time value of money (TVM) is fundamental in engineering economics and financial analysis.
It states that a rupee (or dollar) today is worth more than the same amount in the future due to its potential earning capacity.
This principle is incorporated in methods that discount future cash flows to their present values.
Let's analyze each option:
(1) Payback period: This method simply measures how long it takes to recover the initial investment.
It does not account for the time value of money — cash flows are treated at face value regardless of when they occur.
(2) Net return: Also known as accounting profit, it is a basic metric that subtracts costs from total returns.
It too does not discount future values or account for inflation or opportunity cost.
(3) Rate of return on investment (ROI): This is a ratio of gain to cost, calculated from total values without considering the timing of cash flows.
(4) Net present worth (NPW): This method does include the time value of money.
NPW (or NPV – Net Present Value) discounts all future cash inflows and outflows to their present values using a discount rate, usually representing the cost of capital or required rate of return.
It reflects the true profitability of a project over time, making it a superior and widely accepted evaluation method.
Hence, the correct answer is:
Net present worth.