Which statement is true about PV vs NPV functions?

Which statement is true about PV vs NPV functions?

• A. PV is used for irregular cash flows
• B. NPV assumes constant cash flows
• C. PV is used for regular, equal payments
• D. NPV ignores timing of cash flows

Answer: (C)

Present value functions are built around valuing a stream of payments as of today. The PV function is designed to compute the current value of a series of equal payments made each period at a given interest rate over a fixed number of periods. Because the payments are regular and the amount is constant, PV is the natural tool for regular, equal payments such as standard annuities. NPV, in contrast, handles a schedule of cash flows that can occur at different times and vary in size; it discounts each cash flow according to when it occurs, so it does not require constant amounts and it explicitly uses timing. So the statement that PV is used for regular, equal payments is true. The other ideas don’t fit: PV isn’t limited to irregular cash flows, NPV does not require constant cash flows, and NPV does not ignore timing since each cash flow is discounted.

Present value functions are built around valuing a stream of payments as of today. The PV function is designed to compute the current value of a series of equal payments made each period at a given interest rate over a fixed number of periods. Because the payments are regular and the amount is constant, PV is the natural tool for regular, equal payments such as standard annuities. NPV, in contrast, handles a schedule of cash flows that can occur at different times and vary in size; it discounts each cash flow according to when it occurs, so it does not require constant amounts and it explicitly uses timing. So the statement that PV is used for regular, equal payments is true. The other ideas don’t fit: PV isn’t limited to irregular cash flows, NPV does not require constant cash flows, and NPV does not ignore timing since each cash flow is discounted.