Introduction
The choice of capital budgeting methods to be applied by companies defers and at times both recommended and non-recommended methods are commonly utilized by some large corporations which rely more on capital budgeting. The choice of the method to be applied is also influenced by growth opportunities, foreign sales, characteristics of the Management, industry, leverage, dividend payout ratio and growth opportunities and so forth (Blackstaff, 2012).
It's good to note that, there exist various methods used to determine investment decisions, the choice is, however, not arbitrary (Blackstaff, 2012). According to Fabozzi and Ake (2013), Many professions in the field of management advice on the use of NPV or IRR and moreover discouraging other methods such as undiscounted payback period as they are rendered to be relatively inaccurate. However, all other factors held constant, using NPV or IRR measurement to gauge projects will in most cases result in the same findings but there exist some projects which they may result to some deviation in the outcomes of the two methods (Sultana, 2015).
In general, both tools are majorly used to evaluate the profits, and each have its pros and cons, however, the key question that begs is – which technique is better? There exist debates that argue that NPV is better while others support that IRR is better across the business world; hence, this paper will offer a deeper review of the methods and consequently evaluate the difference between the two approaches to determine which of them has more relevance. The paper will also consider the available literature and case studies to enhance a more solid understanding of these two primary tools and later give a comprehensive conclusion.
References
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