Which capital budgeting technique considers the time value of money?

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Q: Which capital budgeting technique considers the time value of money?

Solution: Net Present Value (NPV) takes into account the time value of money by discounting future cash flows.

Steps: 6

Step 1: Understand what capital budgeting is. It is the process of planning investments in long-term assets.
Step 2: Learn about the time value of money. This concept means that money today is worth more than the same amount in the future due to its potential earning capacity.
Step 3: Identify different capital budgeting techniques. Common techniques include Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period.
Step 4: Focus on Net Present Value (NPV). NPV is a technique that calculates the value of future cash flows in today's terms.
Step 5: Understand how NPV works. It discounts future cash flows back to their present value using a specific discount rate.
Step 6: Conclude that NPV is the capital budgeting technique that considers the time value of money.