The net present value method of project evaluation is preferred to the internal rate of return method because:
A)the internal rate of return method may give multiple rates of return or zero rates of return in some cases,but not for mutually exclusive projects.
B)the internal rate of return method may give an inconsistent ranking due to the magnitude or timing of cash flows.
C)most projects are independent rather than mutually exclusive.
D)the internal rate of return method yields net present value profiles that do not intersect for mutually exclusive projects.

Question

Quizplus · Accepted Answer

The net present value method is preferred because it considers the size and timing of all cash flows and gives a dollar amount estimate of a project's profitability. On the other hand, the internal rate of return method assumes that cash flows are reinvested at the project's internal rate of return, which may not be realistic. Also, the internal rate of return method may give inconsistent rankings due to the magnitude or timing of cash flows, whereas the net present value method does not have this issue. The other choices are not correct because multiple rates of return can occur for non-mutually exclusive projects using the internal rate of return method, most projects being independent is not a factor in the comparison, and the net present value profiles can intersect for mutually exclusive projects using the internal rate of return method.

The Net Present Value Method of Project Evaluation Is Preferred