Match List I with List II:

​Choose the correct answer:​

Correct option is C

The correct matching is:

• A – NPV (Net Present Value) → III (Balance between flexibility and consistency):
  NPV considers the time value of money and cash flows over the project's life, offering a good balance between flexibility (evaluates cash flows at different times) and consistency (applies a consistent discounting approach).

• B – Payback → II (Highly inflexible):
  Payback method simply looks at how quickly the initial investment is recovered, ignoring cash flows after payback and the time value of money, making it rigid or inflexible.

• C – Cash Returns → IV (Relatively consistent):
  Cash Returns approach considers actual cash inflows and is more consistent than accounting measures because it focuses on real money, not accounting profits.

• D – Accounting Returns → I (Insufficiently consistent):
  Accounting Returns are based on accounting profits which can vary based on accounting policies, making it less consistent and more subjective.

Information Booster:

1. NPV (Net Present Value):

   • It discounts future cash flows to the present value using a discount rate, typically cost of capital.

   • It reflects profitability by considering all cash inflows/outflows over a project’s life.

   • Balances flexibility (can adapt to varying cash flows over time) with consistency (standard discounting approach).

   • Widely preferred in capital budgeting due to its accuracy in evaluating investment worth.

2. Payback Period:

   • Measures time to recover initial investment without considering profitability beyond that point or time value of money.

   • Simple but highly inflexible, does not account for profitability or risk over full project life.

   • Often used as a rough screening tool but not for final decisions.

3. Cash Returns:

   • Focuses on actual cash inflows, reducing distortions caused by accounting policies.

   • More consistent and reliable than accounting profits for evaluating project returns.

   • Useful in industries where cash flow is a better indicator of performance than accounting profit.

4. Accounting Returns (ARR - Accounting Rate of Return):

   • Based on accounting profit and book values, which may not reflect true economic value.

   • Prone to inconsistency due to different accounting methods, depreciation, and policies.

   • Less preferred due to its subjectivity and lack of consideration for timing of returns.​