What are your thoughts on why payback and IRR are more frequently used than NPV, when...
What are your thoughts on why payback and IRR are more frequently used than NPV, when evaluating projects?
Homework Answers
Hi,
NPV,IRR and payback methods are used to evaluate and compare between projects.
In NPV method, project's cash flows are discounted at appropriate discount rate.
IRR method is used to find the rate of return of project.
Payback method determines the time in which project will recover it's investment.
Managers prefer IRR over NPV because it gives certain percentage which is easy to compare against other projects. Also managers love playing with percentage rather than absolute numbers. Also It is prefered over NPV because it can be used to comparing projects of any size unlike NPV.
Payback is the easiest way method to compare the projects. Managers always want to find out by what time there investment will be recovered and the same they want to show it to board.
Regards
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