Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 23

(Appendix B): When analyzing a proposed capital investment, what conditions or factors may lead the results to differ between the net present value (NPV) and internal rate of return (IRR) decision models?

Step 1 of 2

NPV is a substantial method used in capital budgeting to evaluate the project. With help of NPV, the company can decide whether to accept or reject the project. NPV is the change between the present value of all the future cash inflows and the present value of all the cash outflows over some time.

The internal rate of return is an approximation of the true rate of return on investment. Technically it is the rate of return for which the NPV of the project is zero. The project is accepted when the IRR of the project is more than WACC.