NPV - (i Computation of IRR is a tough call whereas NPV s...

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Both the NPV method and the IRR method are considered financially sophisticated. Why would one be preferred to the other? Is your answer influenced by the audience, application, etc.? Think in terms of internal discussions and external advice scenarios in your answer. Solution: NPV is nothing but the difference between the PV of all future cash inflows which is discounted at company’s cost of capital or required rate of return and outflows. On the other hand IRR is that rate at which PV of cash inflow is equal to outflow. There are certain reasons why one method would be preferred over the other –
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Unformatted text preview: (i). Computation of IRR is a tough call whereas NPV s very easy to compute. Thus for quick result NPV may be preferred. (ii). The IRR approach creates a peculiar situation if we compare two projects with different inflow/outflow patterns. Whereas NPV always gives a correct answer. (iii). IRR assumes that all the cash flows which is received during the period of the project will again be invested at the same rate which is not always true. Whereas in NPV if the rate changes it can be discounted at different rates....
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This note was uploaded on 10/03/2011 for the course ACCOUNTING 103 taught by Professor Ngo during the Spring '11 term at Berkeley.

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