How is the NPV rule related to the goal of maximizing shareholder wealth, and under what conditions would you expect the NPV and IRR rules to return the same accept / reject decision? Identify one problem with using IRR as part of this decision-making process.

Finance discussion 1 | Business & Finance homework help

It is aligned with the objective of maximising shareholder wealth because it allows companies to compare projects to determine which will yield the best return. This is done by calculating the cash flow expected from every project. It takes into consideration both money received (investments and sales) as well as payments made. This is done by taking into consideration both the receipt of money (investments and sales) as well as payments that have been made.Then discounting the cash flow for time value. The NPV uses a rate of opportunity cost called a discounted rate that reflects inflation and risk. The greater the NPV, the more value shareholders will receive.

Under some conditions, NPV or IRR can produce the same results, for example, when there are no differences in risk levels, investment sizes, lifecycles, etc., but both have similar accept/reject decisions. If two projects are mutually exclusive—meaning only one can be accepted—and they have identical life cycles and required investments but different rates of return, then using either IRR or NPV would yield the same result as these methods prioritize selecting whichever investment generates higher returns for shareholders.

IRR ignores the capital structure of a project when deciding whether or not to invest. While two projects could offer the same returns according to IRR calculations, they may not benefit shareholders equally due to different capital structures. Being solely reliant on IRR can lead to bad investments because other factors need to be evaluated when evaluating investment opportunities.