Of Capability In Business Analysis CCBA · Free Practice Question Medium
Question 8
A business analyst (BA) is assessing the potential value of two design options for a new software system. Option A offers advanced features but is more expensive to develop, while Option B is simpler and less costly. Which financial calculation would be most appropriate for the BA to use to compare the long-term profitability of these two options, taking into account the time value of money?
- A Internal Rate of Return (IRR), to calculate the discount rate at which the net present value of each option becomes zero.
- B Net Present Value (NPV), to determine the present value of future cash flows for each option, discounted to today's dollars.
- C Payback Period, to determine how long it will take to recoup the initial investment for each option.
- D Return on Investment (ROI), to calculate the percentage return on the investment for each option.
Reveal correct answer
Correct answer: B
Explanation
Net Present Value (NPV) is the most appropriate calculation for comparing the long-term profitability of design options because it considers the time value of money by discounting future cash flows to their present value. This allows for a more accurate comparison of options with different costs and benefits over time.Discussion
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