How Do NPV and IRR Differ

question 13

Multiple Choice

How do NPV and IRR differ?

• A) NPV measures profitability in absolute terms, whereas the IRR method measures profitability in relative terms.
• B) IRR should be used for choosing among competing, mutually exclusive projects.
• C) NPV considers the time value of money and IRR does not.
• D) Both NPV and IRR will generate the same decisions.

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Definitions:

Information Content Effect

Refers to how a company's stock price reacts to the announcement of financial information, indicating the market's response based on the news' perceived value.

Dividend Payout

Dividend Payout refers to the proportion of earnings that a company distributes to its shareholders as dividends.

NPV Projects

Projects evaluated using Net Present Value, a method to calculate the profitability by comparing the present value of cash inflows with the present value of cash outflows over time.

Low Dividend Payouts

A company strategy of distributing relatively small portions of earnings to shareholders as dividends.