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Discuss why IRR is better criteria for decision making than NPV. (2.5 marks)

Discuss why IRR is better criteria for decision making than NPV. (2.5 marks)

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Answer:-

IRR is considered to be better criteria for decision making because of the following reasons:-

1. IRR is simple to calculate and easier to understand. For an investor with no financial background, IRR interpretation is easy and tehrefore helps them to take rational decisions

2.In case of mutually exclusive projects, selecting projects on the basis of NPV at hurdle rate may be misleading. IRR doesnot require calculation of hurdle rate or required rate.Therefore in this case IRR provide better results than NPV

3. Among the rates of discount used IRR is the only rate that indicates full utilisation of NCF.

4. MIRR provide company's profit to be reinvested at more realistic rate and allows users to set reinvestment rate at different stages of cash flows. Thus it helps in a better way to make decisions

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