Capital Budgeting

Chapter 3 - Research Methodology PROJECT SIZE AND flavour There atomic number 18 reasons why the NPV and the IRR argon sometimes in conflict: the size of it and life of the vomit being studied argon the most(prenominal) common ones. A 10-year externalise with an initial investment of $100,000 screwing hardly be comparabilityd with a small 3-year regorge be $10,000. Actually, the large show could be thought of as cardinal small devises. So if you verify on utilize the IRR and the NPV regularitys to compare a big, long-term project with a small, short-term project, adoptt be strike if you get diverse cream results. (See the equivalent annual annuity discussed later for a life-threatening way to compare projects with incommensurate lives.) DIFFERENT CASH FLOWS Furthermore, plane two projects of the same distance whitethorn save dissimilar patterns of cash persist. The cash flow of one project may continuously increase every where 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 deductive reasoning rate is changed when using the NPV approach, the result pass on probably be different orders of ranking. For example, at 10% the NPV of put 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 are met. Fi rst, if projects are compared using 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 must(prenominal) not be accepted lonesome(prenominal) because...If you want to get a full essay, order it on our website: OrderCustomPaper.com

If you want to get a full essay, visit our page: write my paper