Question 7
a) Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated? Explain your answer.
b) If the payback was the only method a firm used to accept or reject projects, what payback should it choose as the cutoff point, that is, reject projects if their paybacks are not below the chosen cutoff? Is your selected cutoff based on some economic criteria, or is it more or less arbitrary? Are the cutoff criteria equally arbitrary when firms use the NPV and/or the IRR as the criteria? Explain.
c) Why do most academics and financial executives regard the NPV as being the single best
criterion and better than the IRR? Why do companies still calculate IRRs?
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