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      Question

      A pharmaceutical company is evaluating a project with a

      15-year horizon. The management is concerned about the time value of money and the project's long gestation period. Which capital budgeting technique is most suitable in such long-term evaluations?
      A Payback Period Correct Answer Incorrect Answer
      B Accounting Rate of Return Correct Answer Incorrect Answer
      C Profitability Index Correct Answer Incorrect Answer
      D Internal Rate of Return Correct Answer Incorrect Answer
      E Net Present Value Correct Answer Incorrect Answer

      Solution

      NPV is best suited for evaluating long-term projects because it considers the time value of money and gives absolute value addition. IRR may give misleading results when cash flows are unconventional.

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