Bert has just been hired by your company as a summer co-op student and has been assigned to assist you. Bert is puzzled about why your company is calculating IRR and payback periods for investment projects. According to Bert’s finance textbook, NPV gives the best measure of the impact of a project on shareholder wealth.
a. Explain to Bert the advantages and disadvantages of payback and IRR.
b. Which evaluation techniques are the most popular with companies (i.e., your company’s clients)?
c. Given the disadvantages and limitations of payback and IRR, why do you think so many CFOs continue to use them as criteria for evaluating projects?