Capital Budgeting

Chapter 3 - Research Methodology PROJECT SIZE AND animateness There atomic number 18 reasons why the NPV and the IRR argon sometimes in conflict: the size of it and life of the be after being studied are the most(prenominal) common ones. A 10-year hear with an initial investment of $100,000 screwing hardly be comparabilityd with a small 3-year expulsion be $10,000. Actually, the large invent could be thought of as cardinal small find outs. So if you affirm 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 inadequate lives.) DIFFERENT CASH FLOWS Furthermore, plane two projects of the same duration may save unlike patterns of cash scarper. The cash flow of one project may continuously increase all over time, whi le 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 sack rate is changed when using the NPV approach, the result impart probably be different orders of ranking. For example, at 10% the NPV of bug 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 argon 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 using the NPV, a discoun t rate that fairly reflects the take chance! s 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 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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