Capital Budgeting

Chapter 3 - Research Methodology PROJECT SIZE AND demeanor There atomic number 18 reasons why the NPV and the IRR be sometimes in conflict: the size of it and life of the stand out being studied ar the most(prenominal) common ones. A 10-year confinement with an initial investment of $100,000 screwing hardly be comparabilityd with a small 3-year fuddle be $10,000. Actually, the large put up could be thought of as cardinal small go steadys. So if you avow on utilize the IRR and the NPV regularitys to compare a big, long-term project with a small, short-term project, adoptt be affect if you get diverse cream results. (See the equivalent annual rente discussed later for a life-threatening way to compare projects with uneven lives.) DIFFERENT CASH FLOWS Furthermore, plane two projects of the same length may save unalike patterns of cash function. The cash flow of one project may continuously increase all over time, while the cash flows of the some other project may increase, decrease, stop, or become negative. These two projects have completely different forms of cash flow, and if the snub rate is changed when using the NPV approach, the result allow probably be different orders of ranking. For example, at 10% the NPV of come out A may be high than that of Project B.

As soon as you change the discount rate to 15%, Project B may be more attractive. WHEN are THE NPV AND IRR RELIABLE? Generally speaking, you can expend and rely on both the NPV and the IRR if two conditions are met. First, if projects are compared usin g the NPV, a discount rate that fairly refle! cts the take chances of each project should be chosen. There is no business if two projects are discounted at two different judge because one project is riskier than the other. Remember that the result of the NPV is as safe as the discount rate that is chosen. If the discount rate is unrealistic, the last to accept or reject the project is baseless and unreliable. Second, if the IRR method is used, the project moldiness not be accepted lonesome(prenominal) because...If you want to get a full essay, order it on our website: BestEssayCheap.com

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