Net Present Value and Internal Rate of Return

Topic 

Net Present Value and Internal Rate of Return

Instructions 

1. Describe how net present value is used in the financial decision making process.
2. Explain the disadvantages of using the payback method.
3. Compare and contrast the internal rate of return (IRR) method from the net present value method (NPV).

Answer Preview 

Net present value is the amount that needs to be paid today to earn certain lumpsum is future. The main idea behind net present value is that a dollar today is no same as a dollar tomorrow. This is because money faced with the risk of losing its value. In financial decision, net present value is highly applicable. For example, if a company has a money target to achieve in future, it has to know the amount that needs to be invested at predetermined rate to accumulate to that amount.

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