Comments on: Capital Budgeting and the Pros and Cons of IRR and NPV http://www.financialmodelingguide.com/valuation-concepts/capital-budgeting-irr-npv/ Free online resource for financial modeling advice, tips and tricks Wed, 04 May 2011 07:24:19 +0000 hourly 1 http://wordpress.org/?v=3.1.2 By: Nida http://www.financialmodelingguide.com/valuation-concepts/capital-budgeting-irr-npv/comment-page-1/#comment-18116 Nida Sat, 02 Oct 2010 12:26:54 +0000 http://www.financialmodelingguide.com/valuation-concepts/capital-budgeting-and-the-pros-and-cons-of-irr-and-npv/#comment-18116 I don't get the logic as to why should an IRR higher than NPV rate should be accepted, because a higher discount rate means lower net present value, and thus we should rather opt for a rate which offers us a higher NPV. Can anybody please help me get rid of this confusion?? I don’t get the logic as to why should an IRR higher than NPV rate should be accepted, because a higher discount rate means lower net present value, and thus we should rather opt for a rate which offers us a higher NPV. Can anybody please help me get rid of this confusion??

]]> By: Ghazi http://www.financialmodelingguide.com/valuation-concepts/capital-budgeting-irr-npv/comment-page-1/#comment-1200 Ghazi Sat, 21 Feb 2009 20:37:03 +0000 http://www.financialmodelingguide.com/valuation-concepts/capital-budgeting-and-the-pros-and-cons-of-irr-and-npv/#comment-1200 In Case of mutually exclusive projects, We'll Rely on the Decision got by using NPV method, because IRR value exists where NPV Value is Zero, or you can get this by Hit & Trial Method. In Case of mutually exclusive projects, We’ll Rely on the Decision got by using NPV method, because IRR value exists where NPV Value is Zero, or you can get this by Hit & Trial Method.

]]> By: CMA. Devarajan Swaminathan http://www.financialmodelingguide.com/valuation-concepts/capital-budgeting-irr-npv/comment-page-1/#comment-667 CMA. Devarajan Swaminathan Tue, 21 Oct 2008 16:47:26 +0000 http://www.financialmodelingguide.com/valuation-concepts/capital-budgeting-and-the-pros-and-cons-of-irr-and-npv/#comment-667 Also, in the case of mutually exclusive projects IRR and NPV may lead to different decisions. The decision as shown by IRR may not be correct. This can be brought to light using the Incremental Cash flow between two projects. Also, in the case of mutually exclusive projects IRR and NPV may lead to different decisions. The decision as shown by IRR may not be correct. This can be brought to light using the Incremental Cash flow between two projects.

]]> By: Siddhartha http://www.financialmodelingguide.com/valuation-concepts/capital-budgeting-irr-npv/comment-page-1/#comment-399 Siddhartha Sun, 17 Aug 2008 07:13:37 +0000 http://www.financialmodelingguide.com/valuation-concepts/capital-budgeting-and-the-pros-and-cons-of-irr-and-npv/#comment-399 IRR does not take into account the variation in time-period for returns on investment and it does not justify the quick early returns to slower returns. Hence, IRR hinders in utilisation of capital to the maximum period of the project, as it favours for the early returns for higher NPVs. The Profitability Index (PI), computed as the (PV of future cash flows) / (PV Initial investment), is probably a better measure as it allows you to identify the relationship of investment to payoff of a proposed project. Hence we should adhere to the following route when assessing investment returns: NPV, then PI, and finally only IRR. IRR does not take into account the variation in time-period for returns on investment and it does not justify the quick early returns to slower returns.

Hence, IRR hinders in utilisation of capital to the maximum period of the project, as it favours for the early returns for higher NPVs.

The Profitability Index (PI), computed as the (PV of future cash flows) / (PV Initial investment), is probably a better measure as it allows you to identify the relationship of investment to payoff of a proposed project.

Hence we should adhere to the following route when assessing investment returns: NPV, then PI, and finally only IRR.

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