The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method

Question

Quizplus · Accepted Answer

The Net Present Value (NPV) method discounts cash flows at the firm's weighted average cost of capital, which is a more conservative approach than using the project's internal rate of return. The WACC represents the cost of financing for the entire firm and takes into account the risk associated with the project, making it a more reliable measure of the project's profitability. Thus, the firm is less likely to select an unprofitable investment. Choice A is incorrect because using the project's IRR can lead to incorrect investment decisions in situations where projects have nonconventional cash flows. Choice B is incorrect because liquidity is not the primary concern when selecting investment projects. Choice D is incorrect because the NPV method is widely recognized as a conservative investment selection technique.

The Net Present Value Method Is a More Conservative Technique