(Compare/Contrast NPV and IRR) Glenda’s High Fashion Boutique is looking for a new location for its store. Glenda wants to purchase a small building rather than leasing space in a mall, as she has done in previous years. Her realtor has shown her four possible locations and her accountant has compiled the following information about each of the locations:
|
Location A |
Location B |
Location C |
Location D |
|
|
IRR |
22% |
16% |
12% |
15% |
|
NPV |
$25,000 |
$40,000 |
$30,000 |
$45,000 |
Glenda is bewildered by the fact that Location A has the highest IRR but the lowest NPV. She is confused as to which measure to use in order to assess each of the investments.
- Explain to Glenda why Location A might have a higher IRR but lower NPV than the other two locations.
- Which is a better indicator of future potential—IRR or NPV? Explain why.
- What other factors should Glenda consider in order to make a good decision?