“NPV method is superior than IRR, for assessing the financial viability of a capital investment project.”?

Question

explain your views on this statement

Answer 1

Both methods will tell you what projects are profitable and what projects are not.

Here are the problems with IRR.

1. One problem is tht IRR can have multiple solutions. This is in all the textbooks and is mentioned -- but the fact is that it is rarely a problem.

2. IRR does not tell you anything about size. This is the real problem.

Suppose I present you with two projects. The first is risk-free, costs $1,000,000 and returns all principal plus $100,000 in one year. The NPV of this is probably a little under $50,000. The IRR is 10%.

Now let's look at another project. You lend me a nickel today, and I pay you back six cents in a month
The NPV is a little less than a penny. The IR is almost 800%.

The IRR rule would say that lending the nickel is the better deal. The NPV rule says the other project is better.

.

Answer 2

If the projects are independent, the NPV and IRR will give the same result. If the projects are mutually exclusive, the NPV will give the better result.

Answer 3

Both have advantages and disadvantages. NPV gives you actual dollar value in today's monetary terms, IRR takes timing into consideration. Both should provide the same go/no-go answer to capital budgeting issues.