If a firm discovers a ranking conflict exists after evaluating two mutually exclusive capital budgeting projects using the net present value (NPV) technique and the internal rate of return (IRR) technique, which of the following capital budgeting techniques should it use to ensure the correct value-maximizing decision is made?

Question

Quizplus · Accepted Answer

The NPV technique is considered the most reliable capital budgeting technique because it considers the time value of money and discounted cash flows. In case of a ranking conflict between two projects evaluated using NPV and IRR, it is advisable to give more weight to the NPV because it reflects the difference in the present value of cash inflows and outflows over the entire life of the project. In contrast, the IRR only represents the rate of return achieved by the project and may not always provide a clear indication of the true economic value of the project. Therefore, choosing the project with the higher NPV is the better choice for ensuring the correct value-maximizing decision is made.

If a Firm Discovers a Ranking Conflict Exists After Evaluating