The firm is considering two investment projects, A and B. If the firm is able to compute only the net present value or the internal rate of return. Which of the two measures is more reliable?

Question

Quizplus · Accepted Answer

Net present value (NPV) is generally considered more reliable than the internal rate of return (IRR) because it provides a direct estimate of the value added by the project, taking into account the time value of money and the firm's cost of capital. IRR can sometimes lead to misleading conclusions, especially in cases of non-conventional cash flows or when comparing projects of different sizes and durations.

The Firm Is Considering Two Investment Projects, a and B