NPV vs IRR: Investment Decision Making
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Questions and Answers

Which approach tends to be more conservative?

  • IRR
  • Discounted payback period
  • NPV (correct)
  • Payback period

    • What is the primary difference between IRR and NPV assumptions?

  • The expected return on investment
  • The method of calculating the present value
  • The discount rate used
  • The reinvestment rate of cash inflows (correct)

    • Why do companies prefer larger cash inflows in the early years?

  • Due to the downstream uncertainty (correct)
  • Due to the high cost of capital in early years
  • Due to the high returns on investment in early years
  • Due to the low returns on investment in early years

    • When do early year cash inflows tend to have a lower cost of capital?

    <p>Compared to later year cash inflows</p> Signup and view all the answers

    What is the consequence of differences in the magnitude and timing of cash inflows?

    <p>Projects are ranked differently</p> Signup and view all the answers

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