Which of the following is a capital budgeting method that ignores the time value of money?

• A. Payback Period
• B. Net Present Value (NPV)
• C. Internal Rate of Return (IRR)
• D. Discounted Payback Period

Answer: (A)

Verified step by step guidance

1. Understand the concept of capital budgeting methods: Capital budgeting methods are techniques used to evaluate investment projects and decide whether they are worth pursuing. Common methods include Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR), and Discounted Payback Period.
2. Review the time value of money principle: The time value of money states that a dollar today is worth more than a dollar in the future due to its earning potential. Methods like NPV, IRR, and Discounted Payback Period incorporate this principle in their calculations.
3. Analyze the Payback Period method: The Payback Period calculates the time required to recover the initial investment from the cash inflows generated by the project. It does not account for the time value of money, making it a simpler but less precise method.
4. Compare the methods: Net Present Value (NPV) discounts future cash flows to their present value, Internal Rate of Return (IRR) calculates the rate at which the NPV equals zero, and Discounted Payback Period adjusts the payback calculation to include the time value of money. These methods all consider the time value of money, unlike the Payback Period.
5. Conclude that the Payback Period is the capital budgeting method that ignores the time value of money, as it focuses solely on the time required to recover the initial investment without discounting future cash flows.