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

question 136

Multiple Choice

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.

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Definitions:

Adjusted Trial Balance

A trial balance that has been adjusted for any journal entries or corrections, ensuring the accuracy of financial statements.

Net Income

Net income of the company, which is what remains after deducting taxes, expenses, and other costs from its total revenue.

Period

In finance and business, a period refers to a specific duration of time considered for accounting, reporting, or evaluation purposes.

Accounts

A record within an accounting system that keeps track of financial transactions of a specific type, such as assets, liabilities, revenue, expenses, and equity.