Comparisons Between Net Present Value (NPV) and Internal Rate of Return

question 10

Essay

Comparisons between net present value (NPV) and internal rate of return (IRR) methods
Both the NPV and IRR methods have a reinvestment assumption.
i. State the assumption for each method.
ii. One of the advantages of the NPV method over the IRR method is the ability to adjust for risk considerations. Explain how this can be done.

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Definitions:

Income Items

Various types of earnings, from employment, investments, or other sources, that must be reported on a tax return.

Investor

An individual or institution that allocates capital to investments with the expectation of receiving financial returns.

Materially Participate

Regular, continuous, and substantial involvement in business operations, determining if a tax loss is passive or nonpassive.

Passive Income

Earnings derived from a rental property, limited partnership, or other enterprises in which a person is not actively involved.