NPV AND IRR

1057 WordsJan 14, 20145 Pages
ASSIGNMENT TOPIC: “THE ADVANTAGES AND DISADVANTAGES OF USINFG NPV (NET PRESENT VALUE) AND IRR (INTERNAL RATE OF RETURN)” NPV (NET PRESENT VALUE) The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also…show more content…
To understand IRR is difficult It is difficult to understand it because many student cannot understand why are calculating different rate in it and it becomes more difficult when real value of IRR will be two experimental rate because of not equalize present value of cash inflow with present value of cash outflow. 2. Unrealistic Assumption for calculating IRR we create one assumption. We think that if we invest out money on this IRR, after receiving profit, we can easily reinvest our investments profit on same IRR. It is an unrealistic assumption. 3. Hurdle Rate Not Required In capital budgeting analysis, the hurdle rate, or cost of capital, is the required rate of return at which investors agree to fund a project. It can be a subjective figure and typically ends up as a rough estimate. The IRR method does not require the hurdle rate, mitigating the risk of determining a wrong rate. Once the IRR is calculated, projects can be selected where the IRR exceeds the estimated cost of capital. COMPARISM BETWEEN NET PRESENT VALUE (NPV) AND INTRNAL RATE OF RETURN (IRR) NPV and IRR methods are useful methods for determining whether to accept a project, both have their advantages and disadvantages. Advantages: With the NPV method, the advantage is that it is a direct measure of the dollar contribution to the stockholders. With the IRR
Open Document