Why is NPV better than IRR?
Understand the Problem
The question is asking for an explanation of why Net Present Value (NPV) is considered a superior investment evaluation measure compared to Internal Rate of Return (IRR). This involves exploring the advantages of NPV in terms of decision-making, cash flow assessments, and the assumptions underlying each method.
Answer
NPV is generally better than IRR because it considers varying cash flows and multiple discount rates.
The final answer is NPV is generally better than IRR because it estimates a precise figure considering the present value of anticipated future cash flows, and it is more reliable in situations with varying cash flows or multiple discount rates.
Answer for screen readers
The final answer is NPV is generally better than IRR because it estimates a precise figure considering the present value of anticipated future cash flows, and it is more reliable in situations with varying cash flows or multiple discount rates.
More Information
NPV is favored in scenarios where the directions of cash flows over time are inconsistent or when handling multiple discount rates, offering a more straightforward approach for project evaluation.
Tips
A common mistake is assuming IRR and NPV will always provide the same project ranking; NPV might be more accurate in complex cash flow scenarios.
Sources
- Net Present Value vs. Internal Rate of Return - investopedia.com
- Net Present Value vs. Internal Rate of Return - afponline.org
- NPV vs IRR : Which is better and Why - linkedin.com
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