Capital Budgeting

Chapter 3 - Research Methodology PROJECT SIZE AND intent There atomic number 18 reasons why the NPV and the IRR argon sometimes in conflict: the size of it and life of the toil being studied argon the most(prenominal) common ones. A 10-year rove with an initial investment of $100,000 screwing hardly be comparabilityd with a small 3-year roll be $10,000. Actually, the large roll could be thought of as cardinal small run intos. So if you put forward 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 unbalanced lives.) DIFFERENT CASH FLOWS Furthermore, plane two projects of the same distance whitethorn save distinct patterns of cash escape. The cash flow of one project may continuously increase oer time, while th e 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 deduction rate is changed when using the NPV approach, the result pull up stakes probably be different orders of ranking. For example, at 10% the NPV of protrude 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 ar 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 co mpared using the NPV, a discount rate that f! airly 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 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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