In comparing the internal rate of return and net present value methods of evaluation,
A) internal rate of return is theoretically superior, but financial managers prefer net present value.
B) financial managers prefer net present value, because it is presented as a rate of return.
C) net present value is theoretically superior, but financial managers prefer to use internal rate of return.
D) financial managers prefer net present value, because it measures benefits relative to the amount invested.

Question

Quizplus · Accepted Answer

Net present value (NPV) is theoretically superior because it provides a direct measure of the added value of an investment in terms of currency, while internal rate of return (IRR) can sometimes give misleading results, especially with non-conventional cash flows or mutually exclusive projects. However, financial managers often prefer IRR because it is expressed as a percentage, which is easier to compare with required rates of return or cost of capital.

In Comparing the Internal Rate of Return and Net Present