NPV vs. IRR as a Capital Budgeting Decision Criterion

The appropriate method of evaluating the new capital investment projects for this company can be found by conducting a comparative analysis between IRR and NPV. Focusing first on their advantages, the NPV method provides a direct measure in terms of dollar contribution it brings to the stakeholders of the company (Rich & Rose, 2014). IRR on the other hand has an advantage of showing the returns of the original money which was invested. It also expresses the required capital and the profits in terms of percentage which gives a clear record of rates and changes appropriately.  However, the NPV method does not allow the measurement of the project size (Rich & Rose, 2014). NPV also has a weakness of not giving clarity of the duration within which the project may take. The accuracy of cash flows calculations is also very difficult to coordinate and handle.   The IRR is on the other hand disadvantageous in that the outcome answers might be conflicting. The other challenge of IRR is usually experienced when mutually exclusive projects are run at the same time (Rich & Rose, 2014).

For these new capital investment projects I would recommend NPV method because the advantage surpasses the disadvantage and would best fit this company. The recommendation is based on the fact that the NPV is useful for comparing different projects (Rich & Rose, 2014). For instance, the NPV is able to calculate the present value for several cash flows series at certain period intervals of time. The formula =NPV (rate, value1, value 2,...) could best demonstrate this claim. As the Chief financial officer of this company, I would recommend the owner to deploy the NPV method of investment to realize a smooth coordination of his projects (Rich & Rose, 2014).

Reference

Rich, S. P., & Rose, J. T. (2014). Re-examining an Old Question: Does the IRR Method Implicitly Assume a Reinvestment Rate?. Journal Of Financial Education, 40(1/2), 152-166