Final answer:
The NPV method is preferred over IRR because NPV assumes reinvestment at the firm's cost of capital, which is more conservative and typically lower than the IRR. Present discounted value is an essential concept for comparing present costs to future benefits in finance and other applications.
Step-by-step explanation:
The net present value (NPV) method is considered to be a better method of evaluation than the internal rate of return (IRR) method because NPV assumes that cash flows can be reinvested at the firm's more conservative cost of capital. Both NPV and IRR methods use the time value of money to evaluate investments, but the NPV method is generally preferred due to its assumption about reinvestment rates. Unlike NPV, IRR assumes that future cash flows can be reinvested at the same rate as the IRR, which might not be a realistic assumption if the IRR is unusually high.
Present discounted value is a crucial concept both in finance and other real-world applications, such as when a business must consider present costs against future benefits when making capital investments. When thinking about environmental policies or even determining the value of a lottery payout over time, present discounted value again becomes an essential tool in comparing costs and benefits at different times. In cases such as buying stocks or bonds, this concept helps to assess what one is willing to pay in the present for future benefits by considering factors like potential capital gains, dividends, and current interest rates.