Explanation

Sensitivity analysis assesses how changes in variables (discount rate, cash flows, costs) impact NPV.

It helping understand project risk and uncertainty.

It providing insights into potential outcomes.

Explanation

NPV is preferred over Payback Period.

Because it considers the time value of money.

It recognizing that a dollar today is worth more than a dollar in the future.

Explanation

Internal Rate of Return (IRR) is the financial metric most closely related to NPV.

As both metrics evaluate the profitability of a project or investment.

Explanation

IRR calculation considers Both initial investment and future cash inflows.

Including the initial outlay (negative cash flow) and subsequent inflows (positive cash flows).

This comprehensive approach accurately reflects the project's financial performance and return on investment.

Explanation

A high COGS means that a company is spending a significant amount on producing or purchasing the goods they sell, which leaves less room for profit.

This can be a sign that the company's pricing strategy is not optimal.

They may need to consider price increases or cost reductions to maintain profitability.

Explanation

The Matching principle requires that expenses be matched with the revenues they help to generate.

In the case of COGS, this means matching the costs of producing and selling a product with the revenue generated from that product.

This principle ensures that the costs of generating revenue are properly reflected in the same period as the revenue.

Explanation

Using the present value formula: PV = FV / (1 + r)^n, where FV = $1,000, r = 6% = 0.06, and n = 3 years, we get:

PV = $1,000 / (1 + 0.06)^3 = $837.48

So, the present value of $1,000 to be received in 3 years at an annual discount rate of 6% is $837.48.

Explanation

NPV relies on accurate estimates of future cash flows.

It can be difficult to predict, making it a drawback of this method.

This uncertainty can lead to incorrect conclusions about a project's viability.

Explanation

The time value of money is important in IRR because it:

• Reflects opportunity cost (investors could earn returns elsewhere)
• Accounts for inflation (future cash flows are worth less in today's dollars)
• Standardizes project evaluations (allows comparison of projects with different timelines)

Explanation

IRR (Internal Rate of Return) is a financial metric that uses the time value of money concept to evaluate a project's profitability.

By calculating the rate at which the project generates returns.

It taking into account the present value of future cash flows.