Principles of Managerial Finance, 15th Edition

10.5 Comparing NPV and IRR Techniques

1. LG5

2. LG6

The NPV and IRR decision rules do not always agree on which projects managers should undertake, especially when projects are mutually exclusive (but not only then). In this section, we discuss why these disagreements between methods arise and how to resolve them.

Net Present Value Profiles

As we will discuss later in this text, managers are typically not satisfied to do a simple NPV or IRR calculation and accept or reject an investment idea based solely on that calculation. Instead, managers want to see how sensitive an investment’s NPV is to changes in the assumptions used to generate the NPV. One example of this type of sensitivity analysis is called a net present value profile, which is simply ...