Question

1: Under what circumstances might the IRR and NPV approaches produce conflicting results?

2: Explain why the owners of a company might choose to keep it private?

3: Define underpricing, and explain why the majority of IPOs are underpriced. What role do investment banks play in the price-setting process?

Answer 1

question 1:

The NPV and IRR can lead to a conflicting decision because
1. The distribution of cash flow in the projects. (Non- conventional cash flows).
2. The size of the project.

NPV absolute measure whereas IRR is a relative measure.

NPV gives absolute dollar returns.

IRR are reinvest the cash flow at IRR rate, which is not true and hence not a better technique.
IRR is not prefered for mutually exclusive projects.

Npv is a better technique then compared to the internal rate of return.

Question 2 (Extra):
Pros:
1. The time taken for the issue of shares and raising capital is significantly less.
2. Statutory compliance is less.
3. It provides significant control to a small group of investors.
4. Less number of directors required.
5. Restriction on transferability of shares ensures to a certain extent that ownership remains in the hands of those desired.