正确答案：(c) There are many reasons that could be discussed in support of the view that net present value (NPV) is superior to otherinvestment appraisal methods.NPV considers cash flowsThis is the reason why NPV is preferred to return on capital employed (ROCE), since ROCE compares average annualaccounting profit with initial or average capital invested. Financial management always prefers cash flows to accounting profit,since profit is seen as being open to manipulation. Furthermore, only cash flows are capable of adding to the wealth ofshareholders in the form. of increased dividends. Both internal rate of return (IRR) and Payback also consider cash flows.NPV considers the whole of an investment projectIn this respect NPV is superior to Payback, which measures the time it takes for an investment project to repay the initialcapital invested. Payback therefore considers cash flows within the payback period and ignores cash flows outside of thepayback period. If Payback is used as an investment appraisal method, projects yielding high returns outside of the paybackperiod will be wrongly rejected. In practice, however, it is unlikely that Payback will be used alone as an investment appraisalmethod.NPV considers the time value of moneyNPV and IRR are both discounted cash flow (DCF) models which consider the time value of money, whereas ROCE andPayback do not. Although Discounted Payback can be used to appraise investment projects, this method still suffers from thecriticism that it ignores cash flows outside of the payback period. Considering the time value of money is essential, sinceotherwise cash flows occurring at different times cannot be distinguished from each other in terms of value from theperspective of the present time.NPV is an absolute measure of returnNPV is seen as being superior to investment appraisal methods that offer a relative measure of return, such as IRR and ROCE,and which therefore fail to reflect the amount of the initial investment or the absolute increase in corporate value. Defendersof IRR and ROCE respond that these methods offer a measure of return that is understandable by managers and which canbe intuitively compared with economic variables such as interest rates and inflation rates.NPV links directly to the objective of maximising shareholders’ wealthThe NPV of an investment project represents the change in total market value that will occur if the investment project isaccepted. The increase in wealth of each shareholder can therefore be measured by the increase in the value of theirshareholding as a percentage of the overall issued share capital of the company. Other investment appraisal methods do nothave this direct link with the primary financial management objective of the company.NPV always offers the correct investment adviceWith respect to mutually exclusive projects, NPV always indicates which project should be selected in order to achieve themaximum increase on corporate value. This is not true of IRR, which offers incorrect advice at discount rates which are lessthan the internal rate of return of the incremental cash flows. This problem can be overcome by using the incremental yieldapproach.NPV can accommodate changes in the discount rateWhile NPV can easily accommodate changes in the discount rate, IRR simply ignores them, since the calculated internal rateof return is independent of the cost of capital in all time periods.NPV has a sensible re-investment assumptionNPV assumes that intermediate cash flows are re-invested at the company’s cost of capital, which is a reasonable assumptionas the company’s cost of capital represents the average opportunity cost of the company’s providers of finance, i.e. itrepresents a rate of return which exists in the real world. By contrast, IRR assumes that intermediate cash flows are reinvestedat the internal rate of return, which is not an investment rate available in practice,NPV can accommodate non-conventional cash flowsNon-conventional cash flows exist when negative cash flows arise during the life of the project. For each change in sign thereis potentially one additional internal rate of return. With non-conventional cash flows, therefore, IRR can suffer from thetechnical problem of giving multiple internal rates of return.