Net Present Value Is Preferred to Internal Rate of Return

question 86

Multiple Choice

Net present value is preferred to internal rate of return for capital budgeting decisions because

• A) the internal rate of return does not allow you to determine if the project is acceptable.
• B) the net present value is the only method that allows you to determine which independent project is acceptable.
• C) the net present value allows you to compare mutually exclusive projects.
• D) the internal rate of return for a project is different for each firm.
• E) NPV contains information about a projects "safety margin" which is not inherent in IRR.

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Definitions:

Economic Value

The worth of a good or service determined by its ability to generate income or utility.

Compounded Monthly

Involves calculating and adding interest to the principal amount of an investment or loan on a monthly basis.

Deferred Annuity

An annuity where the start of the periodic payments is delayed by more than one payment interval.

Compounded Annually

The process where interest is calculated once per year and added to the principal sum, affecting the total amount and future interest calculations.