In addition to the NPV method, why must financial managers use multiple criteria for

examining projects? Can you provide an alternative to the NPV?

When we look at the capital budgeting it is where the financial analysis plays one of the vital role
for investment. To invest properly in a right project only one method will not help us to make an
analysis in different perspective. So, the financial managers use multiple criteria for analyzing
the projects and looking at their different advantages and disadvantages so financial analyst can
make a proper decision for investment[ CITATION Ken195 \l 1033 ]. NPV is not always the most
appropriate way appraisal method. So, there are different alternatives ideas to look forward to
like IRR method, Payback method and other different ideas.

NPV vs IRR

Internal rate of return is the interest rate at which the net present value of all the cash flows from
investments equals zero[ CITATION Int1 \l 1033 ]. IRR is very similar to NPV except that the
discount rate is the rate that reduces the NPV of an investment to zero. The IRR is in a fact a
simple investment appraisal method. Here, it gives us the single hurdle number and we have to
be sure all the time that we shouldn’t cross the hurdle. But, IRR also has an drawback in the any
period of investments if the net cash flow is negative, then we end up with 2 IRRs, which will
not solve our problems.
Looking at the NPV we will not have such issues because both negative and positive cashflow
can be considered. When we get an negative cash flow we will end up just subtracting to
negative cash flows. IRR is one of the criteria under multiple criteria which will help us
examining projects in different way.

NPV vs Payback

The payback period in simple words can be defined as the amount of the time it takes to recover
the cost of an investment. The payback period is very necessary to while we make an investment
because it will give us an idea about when will we get our return of the invested amount. When
we are making an investment will our return of investment give us the profit in short period of
time or long. If we are getting return in long period of time will that profit value will be the same
or it the value will be depreciated because of inflation. These things are very important while
making and investment[ CITATION Kag19 \l 1033 ]. But, when we look at this method it is
generally calculated only leading up to period in which we get our amount back. The cash flows
beyond break-even point are totally ignored but in many cases that point can be substantial.
Example : Investments in startups.
Looking at the NPV method which has a required rate and also consider all the cash flows.
Payback is also one of the criteria under multiple criteria which will help us examine in a
different point of view.
There are more different ways like Account Rate Return (ARR) which is a financial ratio used in
capital budgeting and different draw backs of NPV like NPV heavily relies upon the assumptions
and estimation which can have room for error. So, the financial manager must use multiple
criteria for examining the project and the different alternatives to look at the investments.

References
Internal Rate of Return (IRR). (n.d.). Retrieved from Investing Answers:
https://investinganswers.com/dictionary/i/internal-rate-return-irr
Kagan, J. (2019, May 20). Payback Period. Retrieved from Investopedia:
https://www.investopedia.com/terms/p/paybackperiod.asp
Kenton, w. (2019, june 25). Net Present Value. Retrieved from Investopdeia:
https://www.investopedia.com/terms/n/npv.asp
Ross, S. A., Westerfield, R. W., & Jordan, ,. B. (2013). fundamentals of corporate finance . New
York: McGraw-Hill Companies, Inc.