Final answer:
The advantages of the internal-rate-of-return approach to capital project evaluation include considering the time value of money, comprehensive evaluation of cash flows, and the ability to compare the project's return to the cost of capital.
Step-by-step explanation:
The advantage of the internal-rate-of-return (IRR) approach to capital project evaluation is that it considers the time value of money and provides a measure of the project's profitability by calculating the rate of return. This allows companies to compare different projects and make informed decisions based on their potential return on investment.
For example, if a company is considering two projects, Project A with an IRR of 10% and Project B with an IRR of 15%, the company can choose to invest in Project B because it offers a higher rate of return.
Additionally, the IRR method takes into account the cash flows generated by the project over its entire lifespan. It incorporates both positive and negative cash flows, making it a comprehensive evaluation tool. This helps companies assess the long-term financial viability of a project.
Lastly, the IRR method allows companies to adjust for the cost of capital. By comparing the project's IRR to the cost of capital, the company can determine if the project is expected to generate higher returns than the cost of funding it. This helps management make sound investment decisions.