Which statement is a pro of using Net Present Value (NPV)?

• A. Accounts for the time value of cash
• B. Cashflow at end of year is inaccurate
• C. The discount rate is always constant
• D. It cannot be used to assess wealth

Answer: (A)

The main idea being tested is how Net Present Value treats the timing of cash flows. Money received in the future isn’t worth the same as money today, because today’s funds could be invested to earn a return. NPV fixes this by discounting every future cash flow back to its present value using a rate that reflects the opportunity cost and risk. When you sum these present values and subtract the initial investment, you get a single figure that shows how much wealth the project would add today. That’s why this is the best pro: it explicitly measures the effect on wealth by accounting for when cash flows occur.

The other statements don’t describe a pro of NPV. Discounting isn’t about inflows at year-end being inaccurate; it’s about translating future amounts into today’s value. The discount rate isn’t guaranteed to be constant in all analyses, and NPV can still be used to assess wealth—positive NPV indicates wealth creation, while negative NPV signals wealth destruction.