Which of the following is always true regarding the NPV decision model?
A) If a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return (IRR) approach.
B) The NPV and the IRR approaches will always rank two projects in the same order of preference.
C) If a project is found to be acceptable under the NPV approach, it would also be acceptable under the payback approach.
D) If a project is found to be acceptable under the NPV approach, it would also be acceptable under the book (accounting) rate of return approach.
E) If a project is rejected under the NPV approach, it would also be rejected under the payback approach.

Question

Quizplus · Accepted Answer

NPV and IRR techniques are both based on net cash inflows (NCI) that occur at different times. When we compare the cash inflows based on time, the discount rate used in NPV automatically takes care of the fluctuations in time. Therefore, if a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return (IRR) approach.

Option B is incorrect because the two approaches may rank the projects differently. Option C, D, and E are not always true.

Which of the Following Is Always True Regarding the NPV