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Intermediate cash inflows

Intermediate cash inflows Will be compounded by using the cost of capital. The compounded sum so arrived at and the initial cost outflows can be used as the basis of determining the IRR. The limitation of IRR arising out of the inconsistency in the investment rate it...

Reinvestment Rate Assumption

Reinvestment Rate Assumption The preceding discussions have revealed that in the case of mutually exclusive projects, the NPV and IRR methods would rank projects differently where (a) the projects have different cash outlays initially, (b) the pattern of cash inflows...

Decisions

Decisions Project A should be preferred to project B because or its NPV. If we had compared the two projects without incorporating the consequences of replacing the machine at the end of year 2 the decision would have been the revers, because the net present value of...

Time disparity Problem

Time-disparity Problem The mutually exclusive proposals may differ on the basis of the pattern of cash flows generated, although their initial investments may be the same. This may be called the time-disparity problem. The time-disparity problem may be defined as the...

Incremental Approach

Incremental Approach The conflict between the NPV anti IRR in the above situation can be resolved by modifying the IRR so that it is based on incremental analysis. According to the incremental approach, when the IRR of two mutually exclusive projects whose initial...