Explore BrainMass

# Making capital budgeting decisions - IRR or NPV better?

Not what you're looking for? Search our solutions OR ask your own Custom question.

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

Read the article below. Then write a one-to-two page paper answering the following question:
Which method do you think is the better one for making capital budgeting decisions - IRR or NPV?
Defend your answer with references to the background materials.

Please read the following article which is available in Proquest:

Internal rate of return
Computerworld. Framingham, Feb 17, 2003, Gary H Anthes.

Abstract:
Internal rate of return (IRR) is the flip side of net present value (NPV) and is based on the same principles and the same math. NPV shows the value of a stream of future cash flows discounted back to the present by some percentage that represents the minimum desired rate of return, often a company's cost of capital. IRR, on the other hand, computes a break-even rate of return. It shows the discount rate below which an investment results in a positive NPV and above which an investment results in a negative NPV. It is the breakeven discount rate, the rate at which the value of cash outflows equals the value of cash inflows.

Â© BrainMass Inc. brainmass.com December 24, 2021, 11:16 pm ad1c9bdddf

#### Solution Preview

Which method do you think is the better one for making capital budgeting decisions - IRR or NPV?
Defend your answer with references to the background materials.

I believe NPV is a better metric for capital budgeting decision. Net present value takes the present value of the future cash streams at a presumed "hurdle rate" or discount rate and subtracts out the initial investment. The "net" of the initial investment and the PV of the future cash flows is the NPV. The hurdle rate or discount rate can be the IRR that is required by management based on ...

#### Solution Summary

Your draft is 347 words and a reference.

\$2.49