NPV and IRR Similarities Homework Help

NPV and IRR Similarities

The two methods-IRR and NPV would give consistent results in terms acceptance or rejection of investment proposals in certain situations. That is, if a project is it will be indicated by both the methods. If, however, it does not qualify for acceptance, methods will indicate that it should be rejected.

The situations in which the two methods will give a concurrent accept-reject decision will be in conventional and independent projects. A conventional investment is one in which flow pattern is such that an initial investment (outlay or cash outflow) is follow by a of cash inflows. Thus, in the case of such investments, cash outflows are confined. The Independent proposals refer to investments the acceptance of which does not the acceptance of others so that all profitable proposals can he accepted and there are no is in accepting all profitable projects. The reason, why is the methods are equivalent or reject a proposal is simple. The decision-criterion with these methods may he here. According to the V method the decision rule is that a project will be accepted if positive that is, exceeds zero. The IRR method would support projects in whose IRR is more than the required rate of return ( exceeds k). When the project may he accepted or rejected. The projects which have positive net present also have an IRR higher than the required rate of return portrays as (i) positive; ( ii) zero: and (iii) negative corresponding to three (a) IRR > K; (b) IRR = K; (c) IRR = K.

Thus, between the NPV of a project and the discount rate, if there is no situation, NPV is maximum. As the value of K the NPV. At 12 per cent rate of discount, the NPV is zero. This is the IRR additional is the of discount which reduces the NPV to zero. Assuming cost of Liqiud to be per cost, we find that NPV is posiuve by amount (a) and the project is acceptable and under value. If we assume K to the 16 per cent, as the NPV is negative by amount and so is it under IRR as IRR. The two approaches lead to identical results with regard to the accept-reject decision.

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Posted by: andy

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