Practice Problem – NPV

Practice Question

Cases in Finance
Capital Budgeting
NPV
True or False

The net present value (NPV) approach is superior to other capital budgeting techniques primarily because it uses cash flows rather than accounting income.

Answer +
TRUE
Explanation +

The NPV method emphasizes cash flows, which represent the real financial benefits a project provides. Unlike accounting income—which can be influenced by non-cash expenses like depreciation or accounting treatments—cash flows reflect the actual money available for reinvestment or distribution. This makes NPV more reliable for investment decisions. For this reason, the statement is true.