EssayWeek3 - FIN 3400 Essay-Week 3(1 When the discount rate is exactly equal to the internal rate of return(IRR then the resulting NPV is exactly

EssayWeek3 - FIN 3400 Essay-Week 3(1 When the discount...

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FIN 3400 Essay-Week 3 (1) When the discount rate is exactly equal to the internal rate of return (IRR), then the resulting NPV is exactly equal to zero. If we think about the IRR as the actual return you get from a given set of cash flows, and the discount rate as what you want the return to be from the same set of cash flows, then when these are both equal, NPV will be zero. This means what we want to earn on an investment (discount rate) is exactly equal to what the investment’s cash flows actually yield (IRR), and therefore value is equal to cost. However, the possibility of a zero NPV is very remote. In strict economic terms, one should be indifferent to the project, but many projects require further considerations. I think it is very important to stress the importance that the project provides a return just equal to the firm’s required return. (2) Forecasting error is the

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