Which of the following capital budgeting techniques considers the expected total net cash flows from investment?
Cash payback
Annual rate of return
Incremental analysis
Net present value
Understanding Capital Budgeting Techniques:
Capital budgeting helps organizations evaluate long-term investment decisions based on expected cash flows.
NPV (Net Present Value) considers total expected net cash flows over the investment’s life and discounts them to present value.
Why Option D (Net Present Value) Is Correct?
NPV calculates the present value of future net cash flows, adjusting for the time value of money.
If NPV is positive, the investment is considered profitable.
IIA Standard 2120 – Risk Management emphasizes financial decision-making tools like NPV for evaluating investment risks.
Why Other Options Are Incorrect?
Option A (Cash Payback):
Measures time to recover initial investment but does not consider total net cash flows.
Option B (Annual Rate of Return):
Uses accounting income, not cash flows, and does not factor in the time value of money.
Option C (Incremental Analysis):
Compares alternative options but does not evaluate total cash flows from an investment.
NPV is the correct method as it evaluates total expected cash flows over time.
IIA Standard 2120 supports financial analysis in investment decision-making.
Final Justification:IIA References:
IPPF Standard 2120 – Risk Management (Capital Budgeting & Investment Risks)
COSO ERM – Financial Risk Management & Decision Analysis
Financial Management Best Practices – NPV Analysis
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