Academics have long argued for the superiority of NPV over IRR for several
reasons. First, NPV presents the expected change in shareholder wealth given a set of projected cash flows and a discount rate. For mutually exclusive projects, there is some
dispute over the appropriate method. Second, when cash flows come in over a longer
time period, NPV assumes the intermediate term cash flows are reinvested at the cost of
capital. Internal rate of return, on the other hand, assumes the intermediate term cash
flows are reinvested at the IRR, which for any positive NPV project is higher than the
cost of capital.3
Finally, NPV is not sensitive to multiple sign changes in cash flows. It
is a method that presents the expected dollar amount that shareholder wealth would
increase or decrease upon the acceptance of a project.
Academics have long argued for the superiority of NPV over IRR for severalreasons. First, NPV presents the expected change in shareholder wealth given a set of projected cash flows and a discount rate. For mutually exclusive projects, there is somedispute over the appropriate method. Second, when cash flows come in over a longertime period, NPV assumes the intermediate term cash flows are reinvested at the cost ofcapital. Internal rate of return, on the other hand, assumes the intermediate term cashflows are reinvested at the IRR, which for any positive NPV project is higher than thecost of capital.3 Finally, NPV is not sensitive to multiple sign changes in cash flows. Itis a method that presents the expected dollar amount that shareholder wealth wouldincrease or decrease upon the acceptance of a project.
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