Question

, in summation of your discussion net present value calculations require copious amounts of information when reviewing multiple projects. The inability to gather all necessary information or accurate information can weaken this analysis tool. Furthermore, multiple project options with different information may be difficult to analyze. For example, one option may increase sales while another decreases cost. Comparing the information from these two options may result in different answers based on the gathered information. NPV is important because it gives a direct measure of the dollar benefit (on a present value basis) to the firm's shareholders, so we regard NPV as the best single measure of profitability. Based on these assumptions, when evaluating two projects, why would one choose IRR over the NPV approach?

Answer 1

Net present value (NPV)

• The NPV method is based on the present value of the expected money gain or loss from a project
• NPV of an investment is the difference between present value of cash inflow and present value of cash outflow
• When a project has a positive NPV ,it will be profitable and share holders wealth will be increasing then the project will be acceptable by the company
• If the project have zero NPV ,it means there is no profit and no loss.it means future cash flow is equal to initial investment.so the share holder value neither increase or decrease.
• If the project have negative NPV it will be unprofitable because the cost is more than the company expected so they will reject the proposal.it is not acceptable

• It estimate the profitability of the project
• It considering time value of money
• Can be use the project managing required rate of return used the discount rate of return.
• NPV is used to rank the project according to their return expected on the future by using limited capital project
• It is maintaining the fluctuation of required rate of return

Internal rate of return(IRR)

• it is the present value of expected cash inflow is equal to present value of expected cash outflow.
• IRR is the intereset rate at which NPV is equal to zero.
• If IRR >project required rate of return =acceptable
• If IRR < project required rate of return =not acceptable
• As a discounted cash flow method IRR accounts time value of money
• IRR can be compared using required rate of return based on market return and it is easier to understand the managers for making decision than NPV

Even though there are some problems have on IRR let's discuss on it

• The IRR states an assumption that cash inflow of the project re invested on IRR,it is false because the calculated IRR not representing the real return of the project
• If a project may have negative cash flow ,more than one, or the IRR may not be able to calculate
• When investment are mutually exclusive and different size and different cash flow information provided by the IRR may not be useful for decision making