In comparing the internal rate of return and net present value methods of evaluation, ________.
A) internal rate of return is theoretically superior, but financial managers prefer net present value
B) net present value is theoretically superior, but financial managers prefer to use internal rate of return
C) financial managers prefer net present value, because it is presented as a rate of return
D) financial managers prefer net present value, because it measures benefits relative to the amount invested

Question

Quizplus · Accepted Answer

Net present value is theoretically superior, as it takes into account the time value of money and measures the actual value generated by an investment in today's dollars. Internal rate of return only considers the rate of return generated by an investment and does not take into account the size of the investment or the time value of money. However, financial managers still prefer to use internal rate of return because it is easier to understand and communicate to non-financial stakeholders.

In Comparing the Internal Rate of Return and Net Present