Assignment of Npv and Irr

3. Estimate the project’s NPV. Would you recommend that Tucker Hansson proceed with the investment?

IRR uses all cash flows and incorporates the time value of money. When evaluating independent projects, IRR will always lead to the same decision as NPV. Because IRR assumes that cash flows will be reinvested at the internal rate of return, which is not always or even usually the case, it can rank mutually exclusive projects incorrectly. With certain patterns of cash flows, the IRR equation has more than one solution, which confuses the decision rule. IRR is slightly more

Any type of project should be accepted if the NPV is positive and rejected if it is negative.

ii. The project should be accepted if the NPV is positive because such a project increases shareholder value.

If the business was to make an investment on a project that was not right or not profitable the smart thing to do would be to not invest in the project or consider it at all. An investment that does not make any money can be wasteful for the business and make it lose a lot of money in the long run. That is why it is important for those who make the decision to evaluate all of their alternatives, risks, and returns, etc in order to decide on whether or not to reject or accept a project that it might have in mind.

The IRR is the discount rate that makes the present value of the cash inflows equal to the present value of the cash outflows. This is the same as saying that the IRR is the discount rate that makes the net present value equal to zero.

NPV: If NPV>0, accept the project [which are expected to add value to the firm], otherwise don’t bother.

  This method may results in multiple answers or not deal with non conventional cash flow

The IRR method is also known to sometimes have multiple values, one value or no values for a rate of return. This would depend on the time horizon of the project also to whether the project is viable or not. Another limitation is that the IRR method overstates the equivalent annual rate of return when cash flows aren’t per annum and reinvested at different reinvestment rates.

Account for time. Time is money. We prefer to receive cash sooner rather than later. Use net present value as a technique to summarize the quantitative attractiveness of the project. Quite simply, NPV can be interpreted as the amount by which the market

What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?

Net Present Value (NPV) calculates the sum of discounted future cash flows and subtracting that amount with the initial investment of the project. If the NPV of a project results in a positive number, the project should be undertaken. It is the most widely used method of capital budgeting. While discount rate used in NPV is typically the organization’s WACC, higher risk projects would not be factored in into the calculation. In this case, higher discount rate should be used. An example of this is when the project to be undertaken happens to be an international project where the country risk is high. Therefore, NPV is usually used to determine if a project will add value to the company. Another disadvantage of NPV method is that it is fairly complex compared to the other methods discussed earlier.

This analysis will determine whether or not the project is worth pursuing using a net present value (NPV) approach.

Internal rate of return (IRR) is a rate of return on an investment. The IRR of an investment is the interest rate that will give it a net present value of zero.

Mutually exclusive projects are another situation for which NPV must extend its approach. In such projects, the chosen project is usually one which results in the greatest positive NPV because this will produce the greatest addition to shareholders’ wealth. In the case of mutually exclusive investments, ranking becomes crucial as only