Asked by Christopher Vartanian on May 09, 2024
Verified
The NPV and IRR methods,when used to evaluate independent and equally risky projects,will lead to different accept/reject decisions if their IRRs are greater than the cost of capital.
Net Present Value (NPV)
A financial metric that calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time, used to assess the profitability of investments.
Internal Rate of Return (IRR)
A financial metric used to evaluate the profitability of investments, representing the discount rate that makes the net present value of all cash flows from a particular project equal to zero.
Cost of Capital
The rate of return that a company must pay to its capital providers, including both equity and debt holders, for using their capital in the business.
- Learn about the conceptual dominance of the NPV approach compared to the IRR strategy in scenarios involving mutually exclusive investments.
- Identify the preference of using NPV rather than IRR, attributed to the realistic assumptions regarding reinvestment.
Verified Answer
ZK
Zybrea KnightMay 15, 2024
Final Answer :
False
Explanation :
Both NPV (Net Present Value) and IRR (Internal Rate of Return) methods will generally lead to the same accept/reject decisions for independent projects as long as the projects' cash flows are conventional (i.e., an initial outlay followed by a series of positive cash inflows) and the cost of capital is not changing. The difference in accept/reject decisions typically arises in projects with non-conventional cash flows or in the comparison of mutually exclusive projects.
Learning Objectives
- Learn about the conceptual dominance of the NPV approach compared to the IRR strategy in scenarios involving mutually exclusive investments.
- Identify the preference of using NPV rather than IRR, attributed to the realistic assumptions regarding reinvestment.