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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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For competing projects, NPV is preferred to IRR because

  1. a. maximizing IRR maximizes the wealth of the owners.
  2. b. in the final analysis, relative profitability is what counts.
  3. c. choosing the project with the largest NPV maximizes the wealth of the shareholders.
  4. d. assuming that cash flows are reinvested at the computed IRR is more realistic than assuming that cash flows are reinvested at the required rate of return.
  5. e. All of these.

To determine

Identify the reason of preferring NPV over IRR.

Explanation

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

c.

The project with larger NPV has higher level of profitability which ultimately increases the wealth of the shareholders. Therefore, option c is the correct option.

a...

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