week 6 - Week 6 Tutorial Emily Lo Quantitative Analysis...

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Week 6 Tutorial Emily Lo
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Quantitative Analysis (cont.) Internal Rate of Return (IRR) Discount rate at which PV of cash inflow = PV of cash outflow Expected rate of return on a project Advantages Disadvantages Easy to understand and communicate Difficult to compute Does not depend on the interest rate in the market >> NPV cannot be estimated if the discount rate is unknown Multiple answers in non-conventional CFs Assumes CF can be reinvested at IRR but more likely to be reinvested at the required rate of return
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IRR and NPV will lead to identical decisions if: Project’s CF must be conventional Evaluating independent projects In evaluating mutually exclusive projects, NPV and IRR decisions lead to different answers because of >> Scaling problem >> Timing of Cash flow problem NPV assumes that CF are reinvested at the discount rate but IRR assumes CF are invested at the IRR rate >> NPV is more realistic if IRR is much higher than discount rate
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This note was uploaded on 01/09/2012 for the course FINS 1613 taught by Professor Drkhshim during the Three '10 term at University of New South Wales.

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week 6 - Week 6 Tutorial Emily Lo Quantitative Analysis...

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