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Which is better, NPV or IRR? Why?

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Write a brief memorandum that discusses whether you would use NPV, IRR or both in determining whether a large acquisition is in the best interest of a company. Provide your reasoning and the positives and negatives of the above listed capital budgeting techniques.

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The solution provides a discussion that includes giving the student a scenario of NPV and IRR percents to see how this all works. This is in everyday language suitable for novices.

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Write a brief memorandum that discusses whether you would use NPV, IRR or both in determining whether a large acquisition is in the best interest of a company. Provide your reasoning and the positives and negatives of the above listed capital budgeting techniques.

I would use both because they tell me different things. The IRR gives me the percent return over the project life, which is helpful in comparing to other competing uses for capital in the company. NPV, ...

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Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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