HashiCorp Certified: Terraform Associate
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The directors of a company wish to evaluate two mutually exclusive capital investment projects. Both projects have conventional cash flows: an initial outflow followed by a series of annual cash inflows.
The directors are aware of the following three investment appraisal methods: internal rate of return (IRR), net present value (NPV) and accounting rate of return (ARR).
The directors have asked for your advice about which method should be used to evaluate these two projects.
Which of the following is valid advice to give to the directors?
A. NPV should be used because it focuses on wealth creation whereas IRR and ARR are both relative measures.
B. IRR should NOT be used because it could result in multiple IRRs.
C. IRR should be used because both NPV and ARR could lead to an incorrect investment decision.
D. ARR should be used because it is based on profit whereas both IRR and NPV are based on cash flows.
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