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I need help with this question. What is NPV and why is it useful in investment...

I need help with this question. What is NPV and why is it useful in investment decision making? Why might IRR be selected and what are its unique advantages?

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Answer #1

NPV is the PV of cash flows minus investment. If NPV is greater than 0 project must be selected.

NPV is useful in investment decision making in following ways

1. It factors in time value of money
2. It includes risk involves in generating cash flow/.
3. It is good in evaluating project involving large investment is of large scale projects.
4. Here reinvestment rate is discount rate or WACC which is lower than IRR.
5. It helps in ranking between projects.

IRR must be selected. when cash flows are not given but cost of capital is given to evaluate a project .


IRR:
Advantages:
1. Includes time value of money.
2. Good in accepting independent projects.
3. It provides hurdle rate or minimum rate of acceptance when cost of capital is not given.

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