Net present value is preferred to internal rate of return for capital budgeting decisions because
A) the internal rate of return does not allow you to determine if the project is acceptable.
B) the net present value is the only method that allows you to determine which independent project is acceptable.
C) the net present value allows you to compare mutually exclusive projects.
D) the internal rate of return for a project is different for each firm.
E) NPV contains information about a projects "safety margin" which is not inherent in IRR.

Question

Quizplus · Accepted Answer

The net present value (NPV) method is preferred for capital budgeting decisions because it allows for the comparison of mutually exclusive projects by measuring their absolute financial contribution to the firm, unlike the internal rate of return (IRR) which can give multiple values for projects with non-normal cash flows and does not directly measure the increase in value to the firm.

Net Present Value Is Preferred to Internal Rate of Return