Compare and contrast the internal rate of return (IRR) and the net present value (NPV) criteria for evaluating investment proposals.

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

This essay will discuss the net present value (NPV), payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation. It is often said that NPV is the best approach investment appraisal, which I why I will compare the strengths and weaknesses of NPV as well as the two others to se if the statement is actually true.

d. internal rate of return (IRR) the discount rate that forces a project’s NPV to equal zero. The project should be accepted if the IRR is greater than the cost of capital.

The Modified Internal Rate of Return is an underused measure for selection of projects that a company can choose because it is more effective at dealing effectively with periodic free cash flows that develop from the time that an asset is purchased through its life to the point where it is sold, ranking projects and variable rates of return through the project life. The Internal Rate of Return is an inefficient model to make decisions with because it lack the ability to account for the periodic free cash flows, proper ranking and variable returns from certain projects.

Using the IRR method will result in project Q being selected over P due to its higher rate of return. Using the NPV method would result in choosing project P because of its higher NPV. When there are mutually exclusive project, NPV method would be preferred.

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

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.

Another way to determine if a project is going to add value to the company is by calculating the Internal Rate of Return (IRR) is most easily defined as the return that leads to a project NPV equal to zero. Another way to define the IRR is to consider it as the discount rate that at which the NPV of cash outflows equals the NPV of cash inflows. In other words, it’s the most discounted rate at which a project can possibly break even. In theory, if a project has an IRR greater than the company’s required return rate, then the project will be profitable and the company should proceed with project.

1. What is the appropriate required rate of return against which to evaluate the prospective IRR 's from the B ANSWER:The appropriate rate of return against which to evaluate the IRR is the risk-free rate, plus the market risk

Internal rate of return (IRR) and Payback period “IRR of a project provides useful information regarding the sensitivity of the project’s NPV to errors in the estimate of its cost of capital” (Pierson et al.2011, pp.157).This proposal also shows the project is profitable by using Excel to get the IRR of 18.9%, which is

Jaffe et al. (2002:146) argues that IRR is the "most important alternative to the NPV approach", because it is independent of the prevailing capital market interest rate in its attempt to resolve an internal (or intrinsic) rate that is dependent only on the cash flows from the project.

Internal rate of return (IRR) is the discount rate that makes NPV equal to zero. It is also called the time-adjusted rate of return.

IRR is one of the techniques (Lock, 2004). IRR is the rate at which the present value of the future cash flow will be equal to the initial cash flow and the NPV of the project will be zero. A project will be accepted if the cost of capital is lower than the IRR. Otherwise the project will be rejected. IRR provides many benefits. It helps to compare the cost of capital with the rate of return that will be earned on the project. It discounts the future cash flow and give correct decision in most of the cases (Daft, 1997).

Investment has many definitions. In finance, it is ‘the purchase of a financial product or other item of value with an expectation of favorable future returns.’1 In business, investment is ‘the

Internal rate of return (IRR) is the effective rate that results in an NPV of zero.