ACC501 - Business Finance GDB No. 2 Solution Fall 2015 Due Date Tuesday, January 26, 2016 

Discussion Question:

 

IRR and NPV techniques are widely used by corporate managers to evaluate different investment projects. You have learned these techniques in detail in the course of Business Finance. Now, discuss briefly the following questions with conceptual rationale.      

  

  1. Why do we generally prefer NPV over IRR for evaluating every investment proposal?
  2. Following are the results of two mutually exclusive projects. Which project should be accepted and why?

 

Years

Project A

Project B

0

(Rs. 17,000)

(Rs.17,000)

1

Rs. 8,000

Rs. 2,000

2

Rs. 7,000

Rs. 5,000

3

Rs. 5,000

Rs. 9,000

4

Rs. 3,000

Rs. 9,500

NPV

Rs.6,588

Rs. 7,594

IRR

20.0 %

18.55 %

 

 

 

 

 

 

 

 

 

 

 

 

 

Important Instructions:

  1. Your discussion must be based on logical facts.
  2. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
  3. Obnoxious or ignoble answer should be strictly avoided.
  4. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

 

Ø For Detailed Instructions please see the GDB Announcement

 

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Replies to This Discussion

Solution No. 1 (plz read page 146,147 & 148 of handouts)

Net present value (NPV) has preferred over internal rate of return (IRR) as following:-

  1. IRR does not understand the economy scale and disregard cost value of project. At the same time it cannot differentiate between the two projects having the same IRR and difference should be more. Whereas NPV, depend upon absolute values.
  2. IRR assume discounting and reinvestment of cash flows at the same rate. If we consider the IRR of a very good project is 35%, practically we cannot invest the money on this rate of return. But in case of NPV rate of borrowing as well lending near to market rates
  3. IRR enters the problem of multiple IRR when we have more than negative cash flow and the equation is than satisfied with two values therefore have multiples of IRRs. It is not in case of NPV.

 

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