Final answer:
The Internal Rate of Return may lead to the same investment decision as Net Present Value depending on the financing decisions; however, IRR alone may be insufficient for decision-making as it does not consider the scale of investment and assumes reinvestment at the IRR itself. It is advantageous to also consider NPV, which consistently reflects the firm's added value and cost of capital.
Step-by-step explanation:
Comparing the use of the Net Present Value (NPV) and Internal Rate of Return (IRR), the IRR may lead to the same investment decision as the NPV depending on the financing decisions. However, it is crucial to note that the IRR on its own may be insufficient for making an investment decision as it does not account for the scale of investment, assumes reinvestment at the IRR, and may give multiple values for non-conventional cash flows.
The NPV method gives the present value of future cash flows discounted at the hurdle rate and deducts the initial investment. It directly reflects the added value to the firm and is consistent regardless of the financing mix. On the other hand, the IRR is the discount rate at which the NPV of an investment is zero. It does reflect the time value of money and risk but not necessarily the firm's cost of capital, especially if the project's risk profile differs from the company's overall risk profile.
Additionally, the IRR assumes that cash flows can be reinvested at the IRR itself, which may not be realistic, whereas the NPV uses a consistent discount rate reflecting the opportunity cost of capital. Hence, while IRR can be useful, especially for comparing projects of similar scale and timing, relying solely on IRR can be misleading, and it can be beneficial to use NPV as a primary tool for investment decisions.