Asked by Amrita Tambar on Jul 20, 2024
Verified
NPV and IRR can lead to different decisions in situations where project cash flow are conventional.
NPV
Net Present Value, a calculation that compares the present value of a project or investment's cash inflows with its cash outflows.
IRR
Internal Rate of Return; a metric used in capital budgeting to estimate the profitability of potential investments.
Conventional Cash Flow
A cash flow pattern characterized by an initial investment outlay followed by a series of positive cash inflows.
- Determine circumstances in which the use of NPV and IRR calculations produces contrasting decisions on investments, and gain insight into the rationale for these differences.
Verified Answer
EP
Erica PurnellJul 20, 2024
Final Answer :
False
Explanation :
NPV (Net Present Value) and IRR (Internal Rate of Return) can lead to different decisions primarily in situations where project cash flows are unconventional (i.e., the cash flow sign changes more than once) or when comparing mutually exclusive projects with different scales or timing of cash flows. In conventional cash flow projects (initial cash outlay followed by a series of positive cash flows), both NPV and IRR will generally lead to the same accept/reject decision for a single project.
Learning Objectives
- Determine circumstances in which the use of NPV and IRR calculations produces contrasting decisions on investments, and gain insight into the rationale for these differences.