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NPV Method and Cash Flow Estimation

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1. The Payback period and the IRR methods are inferior to the NPV method, but firms still use these methods. Provide a rationale for this inconsistency. Why are they inferior to the NPV method?

2. Discuss some problems associated with cash flow estimation for a project.

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This solution discusses the NPV method and cash flow estimation. The explanation is given in 371 words.

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1. The Payback period and the IRR methods are inferior to the NPV method, but firms still use these methods. Provide a rationale for this inconsistency. Why are they inferior to the NPV method?

Payback period, IRR, and NPV are all capital budgeting decision criteria. Because virtually all capital budgeting decisions are analyzed by computer, so it is easy to calculate all of these decision criteria (Brigham & Houston, 2007). In making the accept/reject decision, large firms generally calculate and consider all of these measures, because each provides a somewhat ...

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