1.

NPV technique is more superior than that of IRR method:

i. NPV indicates the value added to the firm, while IRR shows the percentage
return. Thus, NPV is in line with the objective of the firm (to maximize value of
firm).
ii. The NPV method implicitly assumes that the rate at which cash flows can be
reinvested is the cost of capital, whereas the IRR method assumes that the firm
can reinvest at the IRR. Apparently the NPV assumption is more conservative
and thus better.
iii. IRR approach may not be reliable – that is when projects have non-normal cash
flows. Projects with non-normal cash flows can actually have two or more IRRs,
or multiple IRRs! This issue will not happen to NPV method.

2. Two weaknesses of payback period method are:

i. Time value of money is not taken into consideration.

ii. It ignores the cash flows after the payback period.

To overcome these problems, NPV, IRR and PI (profitability index) should be used because
these methods consider all the cash flows of the projects and the time value of money is taken
into consideration.