The internal rate of return and the net present value methods will give the same accept/reject decision for the same project.

Question

Quizplus · Accepted Answer

Both the Internal Rate of Return (IRR) and the Net Present Value (NPV) methods are used in capital budgeting to evaluate the profitability of investments or projects. They will give the same accept/reject decision because both methods are based on the principle of the time value of money and ultimately aim to assess whether a project adds value to the company. If the NPV is positive (indicating that the present value of future cash flows exceeds the initial investment), the IRR will exceed the cost of capital, leading to the acceptance of the project under both criteria. Conversely, if the NPV is negative, the IRR will be less than the cost of capital, and the project will be rejected under both methods.

The Internal Rate of Return and the Net Present Value