Although the popularity of NPV is growing in recent years, internal rate of return and payback period methods are commonly used in practice. A survey study conducted by John Graham and Campbell Harvey in 2001 shows that 75% of firms surveyed use the NPV for making investment decisions. This contrasts with a similar study done by LJ. Gitman and JR. Forrester, who argued that only 10% of firms use NPV (Berk, 2011:158-159) and Cohen & Yagil claims that IRR is more popular than NPV (Atrill, 2012)
F. Alkaraan and D. Northcott’s study agrees with Graham and Campbell (Atrill, 2012:155-157). They surveyed 83 senior financial managers from large manufacturing corporations and concluded that NPV is seen the most popular, followed by IRR and payback method. However, as capital budgeting decisions often involve major undertakings, therefore risk and rewards had to be carefully weighed, Alkaraan and Northcott also found out that 98% of the managers do not rely on just one investment appraisal technique and 88% have used more than three methods.
In my view, each appraisal method has its advantages and shortcomings as discussed in previous postings, its beneficial to include a combination of alternative methods in evaluating an investment opportunity and using own business judgement as well. Sometimes using alternative rules may give the same answer as NPV, but other times they may differ. In the case the rules conflict, following the alternative rule means undertaking a negative NPV project, thus leading to bad decisions that reduces wealth.
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