NPV vs. IRR as a Capital Budgeting Decision Criterion Part 2
Response to student 1 S.W.
Student 1 S.W stated clearly one advantage of NPV as, providing a measure of contribution directly to the shareholders and the IRR shows the return of original money invested. These two advantages are important in the process of cash budgeting since they help in profit evaluation (Investopedia, 2016). The student has also recommended the company owner to use the method suitable to him or her depending on the kind of investment specifying the one to use and at which time. The student used the concepts that are understandable to my company’s owner because these concepts are commonly applied in the company whenever a project is to be started. However, the student overlooked another important process of capital budgeting which is payback period. This method is simple and gives the company owner the period it takes to pay back the initial investment before undergoing a project. The student cited references to back up the recommendations.
Response to student 2 S.S
The second student addressed other advantages of NPV and IRR. One of the other advantages of NPV is that it reveals to the company how much money the project will make meaning the company owner is able to know whether the company’s value is increasing or not thus it can help the company owner plan very well (Akers, 2016). IRR on the other hand provides an overview of the project that will give the best return of the investment hence the company owner is able to selectively identify the best project. Therefore, the student in this case gave the company owner a direction when selecting a project. The student also used various references to support the recommendations.
References
Gitman, Lawrence J., Zutter, C. J. (2011). Principles of Managerial Finance, 13th Edition. [VitalSource Bookshelf Online]. Retrieved from Investopedia . (n.d.). Advantages and Disadvantages of the NPV and IRR Methods. In Investopedia.com.
Akers, H. (2016). Advantages & Disadvantages of Net Present Value in Project Selection. Retrieved from Small Business: http://smallbusiness.chron.com/advantages-disadvantages-net-present-value-project-selection-54753.html; Lanctot, P. (2016)
