The net present value (NPV) method and the internal rate of return (IRR) method are used to analyze proposed capital expenditures. The IRR method, as contrasted with the NPV method:
A) Is considered inferior because it fails to calculate compounded rates of return.
B) Incorporates the time value of money, while the NPV method does not.
C) Almost always gives a different decision that the NPV method as to the acceptability ("go" versus "no go") of a given proposed investment.
D) Assumes (according to some commentators) that the rate of return on the reinvestment of the cash proceeds is at the indicated rate of return of the project analyzed rather than at the discount rate used.
E) Is preferred in practice because it can handle multiple desired rates of return, which is impossible to do with the NPV method.

Question

Quizplus · Accepted Answer

The IRR method is not considered inferior, and both methods incorporate the time value of money. The NPV and IRR methods generally provide the same decision as to the acceptability of a proposed investment. However, the IRR method assumes that the rate of return on the reinvestment of the cash proceeds is at the indicated rate of return of the project analyzed rather than at the discount rate used, according to some commentators. This can lead to incorrect results in some cases, making the NPV method a better choice for decision-making.

The Net Present Value (NPV) Method and the Internal Rate