Asked by Priya Puppala on Jul 15, 2024
Verified
Although NPV is the best capital budgeting technique, most executives prefer to use:
A) payback because the calculations are easy.
B) profitability index because they are familiar with ratios.
C) IRR because people are more comfortable with rates of return than with the somewhat abstract notion of a present valued dollar.
D) NPV adjusted for inflation because it overcomes the difficulties they have with the method.
Capital Budgeting Technique
A process of evaluating and comparing the potential expenditures or investments which are significant in amount, to determine their worthiness for funding.
Present Valued Dollar
The current value of a future sum of money or stream of cash flows given a specified rate of return.
- Elucidate why the NPV rule is considered superior to the IRR rule when faced with conflicting investment choices.
- Evaluate the shortcomings of the payback method when assessing capital projects.
Verified Answer
VS
Vaibhav SinghJul 20, 2024
Final Answer :
C
Explanation :
While NPV is the best capital budgeting technique, many executives prefer IRR because it is easier for them to understand rates of return than the concept of present value. However, IRR has some limitations and can sometimes produce multiple rates of return.
Learning Objectives
- Elucidate why the NPV rule is considered superior to the IRR rule when faced with conflicting investment choices.
- Evaluate the shortcomings of the payback method when assessing capital projects.