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The Primary Reason That the NPV Method Is Conceptually Superior

question 83

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The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.


Definitions:

Allowance for Doubtful Accounts

A contra account that reduces the total receivables on the balance sheet to reflect the amount that is expected not to be collected.

Selling Receivables

The process of selling a company's outstanding invoices to a third party to improve cash flow and reduce risk.

Risk

The possibility of experiencing loss or other adverse effects in business or investment.

Allowance Method

An accounting technique to estimate and record bad debts by recognizing a provision for accounts receivable that might not be collected.

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