ACCA FM · Chapter 6 · Question 9 of 10
Which of the following is an advantage of net present value (NPV) over internal rate of return (IRR) as an investment appraisal method?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) NPV gives an absolute measure of the increase in shareholder wealth and gives a single unambiguous answer for any cash flow pattern
Explanation
NPV measures in absolute terms the change in shareholder wealth from a project and is unambiguous even for non-conventional cash flows, which can produce multiple IRRs. IRR is a relative percentage measure, which managers often find easier to understand, but it can rank mutually exclusive projects incorrectly. Both methods use discounting, and NPV requires the cost of capital.
More Investment appraisal techniques MCQs
- Q1A project requires an initial investment of $400k. Net cash inflows are expected to be ($000): year 1 90, year 2 120, year 3 150, year 4…
- Q2A machine costs $500k and will be sold for $50k at the end of its 5-year life. Total net cash inflows over the 5 years are expected to be…
- Q3A project requires an investment of $250,000 now and will generate net cash inflows of $70k, $80k, $90k and $60k at the end of years 1 to…
- Q4A project has an NPV of +$18,400 at a discount rate of 10% and an NPV of -$6,200 at 15%. Using linear interpolation, what is the estimated…
- Q5A project costs $100,000 and generates net cash inflows of $40,000 a year for four years, arising evenly through each year. The cost of…