Question

A capital budgeting decision method that considers the time value of money is the

A. accounting rate of return method.
B. return on stockholders' equity method.
C. cash payback method.
D. internal rate of return method.

Answer 1

The internal rate of return method is the capital budgeting decision method that accounts for the time value of money, involving a chosen interest rate reflecting both opportunity costs and risk premium.

Step-by-step explanation:

The capital budgeting decision method that considers the time value of money is the internal rate of return method. This method incorporates the financial concept that money available today is worth more than the same amount in the future due to its potential earning capacity.

A financial investor taking into account the time value of money will select an interest rate that incorporates both the expected rate of return on alternative investments (opportunity cost) and a risk premium, which compensates for the investment's risk level.