The net present value method differs from the internal rate of return method in that:
A)the net present value method discounts cash flows using the risk-free rate of return and the internal rate of return method does not.
B)the internal rate of return method finds the rate of return that results in a zero net present value.
C)both methods yield similar conclusions for mutually exclusive projects.
D)the net present value method discounts cash flows by the required rate of return,whereas the internal rate of return method does not take into account the time value of money.

Question

Quizplus · Accepted Answer

The net present value method discounts cash flows using the required rate of return, whereas the internal rate of return method finds the rate of return that results in a zero net present value. Therefore, the internal rate of return method takes into account the time value of money, just like the net present value method. However, they differ in the way they calculate the rate of return. The net present value method calculates the net present value of all future cash flows using the required rate of return as the discount rate, whereas the internal rate of return method calculates the rate that makes the net present value of all future cash flows equal to zero. While both methods are used to evaluate investment projects, they may lead to different conclusions in the case of mutually exclusive projects.

The Net Present Value Method Differs from the Internal Rate