Question

There are various investment decision rules, which financial managers may select. Choose one of the alternatives to the NPV, and compare and contrast one of the selected alternatives with NPV (payback period, discounted payback period, IRR or profitability index.

Answer 1

NPV and IRR

The NPV gives the net present value of the cash-flows discounted at the required rate of return while the IRR gives the rate of return at which the NPV of the cash-flows is zero

NPV	IRR
Can be calculated for any type of cash-flow	Can be calculated only for conventional cash-flows, ie. Cash-flows in which the sign changes only once
Project must be accepted if the NPV is positive	Project must be accepted if the IRR is greater than the cost of capital
Has a precedence over IRR due to its no conflict charateristic	Has a second priority, generally, next to NPV criterion
There can be only one NPV for a project	There can be a multiple IRR problem for a non-conventional cashflow stream
NPV Is expressed in absolute number	IRR is expressed in percentage