Final answer:
NPV is more reliable than IRR for ranking alternative investments because it considers the time value of money and provides a more accurate assessment. IRR can produce misleading results when cash flow patterns vary.
Step-by-step explanation:
NPV (Net Present Value) produces more reliable measures than IRR (Internal Rate of Return) when ranking alternative investments because NPV takes into account the time value of money and provides a more accurate assessment of the profitability of an investment over its entire lifespan.
IRR, on the other hand, determines the discount rate at which the present value of cash inflows equals the present value of cash outflows. However, IRR can sometimes lead to misleading results, especially when there are multiple investment options with different cash flow patterns.
For example, if two investments have similar initial costs and cash inflows, but differ in the timing of those cash inflows, IRR may rank the investment with earlier cash inflows higher, even though it may have a lower overall profitability.