Table of Contents
- 1 Under what circumstances do NPV and IRR methods differ?
- 2 Why net present value is considered as superior technique?
- 3 Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated explain your answer?
- 4 What does NPV and IRR tell you?
- 5 Why is the NPV preferred over IRR method?
- 6 Why is NPV equal to zero to calculate IRR?
Under what circumstances do NPV and IRR methods differ?
Comparing NPV and IRR The NPV method results in a dollar value that a project will produce, while IRR generates the percentage return that the project is expected to create. Purpose. The NPV method focuses on project surpluses, while IRR is focused on the breakeven cash flow level of a project.
Why net present value is considered as superior technique?
NPV is considered a superior technique, as NPV considers the time value of money, and considers cash flows over the entire life of the project. NPV is considered a superior technique, as NPV considers the time value of money, and considers cash flows over the entire life of the project.
What are two possible causes of conflicts between the IRR and NPV for mutually exclusive projects?
For single and independent projects with conventional cash flows, there is no conflict between NPV and IRR decision rules. However, for mutually exclusive projects the two criteria may give conflicting results. The reason for conflict is due to differences in cash flow patterns and differences in project scale.
When NPV and IRR give conflicting results which method is preferred and why?
This is because in case of Project C more cash flows are in Year 1 resulting in longer reinvestment periods at higher reinvestment assumption and hence it has a higher IRR. As the NPV is not skewed by the overstated reinvestment rate assumption, hence it is the preferred method.
Is it possible for conflicts to exist between the NPV and the IRR when independent projects are being evaluated explain your answer?
It is not possible for conflicts between NPV and IRR when independent projects are being evaluated. NPV is greater than zero (accept project on NPV criteria) at all IRR > WACCs (accept project based on IRR criteria).
What does NPV and IRR tell you?
NPV is is the dollar amount difference between the present value of discounted cash inflows less outflows over a specific period of time. IRR estimates the profitability of potential investments using a percentage value rather than a dollar amount.
Why is NPV is better than IRR?
NPV is expressed in form of cash return value, where as the IRR is expressed in percentage. NPV measure is absolute but IRR measure is relative. For example, an IRR of 20\% may or may not be acceptable. IRR is not applicable to evaluate a project or investment where cash flow is changing over time.
What are the similarities between NPV and IRR?
Both are modern techniques of capital budgeting.
Why is the NPV preferred over IRR method?
Because the NPV method uses a reinvestment rate close to its current cost of capital, the reinvestment assumptions of the NPV method are more realistic than those associated with the IRR method. NPV also has an advantage over IRR when a project has non-normal cash flows.
Why is NPV equal to zero to calculate IRR?
The formula for calculating IRR is very similar to that of calculating the net present value (NPV) because it essentially determines the discount rate-the rate of expected investment earnings-that would set the NPV equal to zero. The NPV represents the value of cash flows at a point in time in the past, present or (expected) future.