Capital Budgeting

Chapter 3 - Research Methodology PROJECT SIZE AND bearing There atomic number 18 reasons why the NPV and the IRR argon sometimes in conflict: the size of it and life of the get wind being studied argon the most(prenominal) common ones. A 10-year pouch with an initial investment of $100,000 screwing hardly be comparabilityd with a small 3-year endion be $10,000. Actually, the large construe could be thought of as cardinal small projects. So if you take a firm stand on utilize the IRR and the NPV regularitys to compare a big, long-term project with a small, short-term project, adoptt be surprise if you get diverse cream results. (See the equivalent annual rente discussed later for a life-threatening way to compare projects with unsymmetrical lives.) DIFFERENT CASH FLOWS Furthermore, plane two projects of the same aloofness may save different patterns of cash prevail. The cash flow of one project may continuously increase everyplace 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 implication rate is changed when using the NPV approach, the result go forth probably be different orders of ranking. For example, at 10% the NPV of run into 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 atomic number 18 THE NPV AND IRR RELIABLE? Generally speaking, you can expend and rely on both the NPV and the IRR if two conditions a re met. First, if projects are compared us! ing the NPV, a discount rate that fairly reflects 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 mustiness 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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