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Net Present Value and Other investment Criteria - The International Rate of Return

Q: IRR and NPv rules always lead to identical decisions

First, the project’s cash flows must be conventional, meaning that the first cash flow (the initial investment) is negative and all the rest are positive. Second, the project must be independent , meaning that the decision to accept or reject this project does not affect the decision to accept or reject any other. First is often typically met but second often not. When both are not met, problems can arise

4 important questions on Net Present Value and Other investment Criteria - The International Rate of Return

What is net present value profile?

A graphical representation of the relationship between an investment’s NPVs and various discount rates.

IRR and NPv rules always lead to identical decisions

First, the project’s cash flows must be conventional, meaning that the first cash flow (the initial investment) is negative and all the rest are positive.

Second, the project must be independent, meaning that the decision to accept or reject this project does not affect the decision to accept or reject any other.

First is often typically met but second often not. When both are not met, problems can arise

What are the problems with IRR?

come about when the cash flows are not conventional, or when we are trying to compare two or more investments to see which is best. In the first case, surprisingly, the simple question ‘What’s the return?’ can become difficult to answer. In the second case, the IRR can be a misleading guide.