Question

Sometimes when management decisions are reached, the investment project with the highest

NPV or IRR is not selected. This occurs because:
A. a lower IRR is a less risky investment.
B. the highest NPV is not necessarily the highest IRR.
C. qualitative factors override quantitative analysis techniques.
D. sometimes management makes the wrong decision.

Answer 1

Qualitative factors can override quantitative analysis techniques in management decisions, leading to the selection of investment projects with lower NPV or IRR.

Step-by-step explanation:

The reason why the investment project with the highest NPV or IRR is sometimes not selected is because qualitative factors can override quantitative analysis techniques. In other words, there are non-financial considerations that management takes into account when making decisions. These factors may include social impact, environmental sustainability, ethical considerations, or strategic alignment with the company's goals and objectives.

For example, a high-risk investment with a high IRR may be rejected if it does not align with the company's long-term strategy or if it goes against the company's values or mission. On the other hand, a lower-risk investment with a lower IRR may be chosen if it brings additional benefits such as brand reputation, customer loyalty, or employee satisfaction.

Therefore, when making investment decisions, management needs to consider both quantitative and qualitative factors to make well-informed choices that align with the company's overall objectives.