In risk analysis, which computation approach is appropriate when costs and benefits vary over time: using either Net Present Value or Internal Rate of Return, or both?

• A. Net Present Value
• B. Internal Rate of Return
• C. Both Net Present Value and Internal Rate of Return
• D. None of the above

Answer: (C)

When costs and benefits shift over time, you must account for the time value of money. Net Present Value does this by discounting all future cash flows back to their present value and then comparing them to the initial investment, yielding a single monetary value that shows how much value is added or lost under a given discount rate. Internal Rate of Return takes the same cash flows and asks what discount rate would make the net present value zero, effectively presenting the project’s profitability as a percentage.

Both approaches are appropriate in risk analysis because they reflect how timing and uncertainty affect value. Net Present Value gives a clear dollar amount of value created (useful for comparing projects and for decision criteria), especially when you use a risk-adjusted discount rate. Internal Rate of Return provides an intuitive gauge of profitability as a rate of return, which can be handy for quick comparisons with other investments or hurdle rates. Since cash flows can vary in timing and magnitude, using both together offers a fuller, more robust assessment than relying on one metric alone.