Unformatted text preview: tream changes sign. Example: Maintenance costs. In addition, it
is possible to have projects with no IRR and a positive NPV
Mutually exclusive projects
- Firms often have to choose between mutually exclusive projects. IRR sometimes
ignores the magnitude of the project. Large projects with a lower IRR might be
preferred to small projects with larger IRR.
Term structure assumption
- We assume that discount rates are constant for the term of the project. What do we
compare the IRR with, if we have different rates for each period, r1, r2, r3, …? It is
not easy to find a traded security with equivalent risk and the same time pattern of
cash flows Please click the advert Finally, note that both the IRR and the NPV investment rule are discounted cash flow methods. Thus, both
methods possess the desirable attributes for an investment rule, since they are based on cash flows and
allows for risk and time value of money. Under careful use both methods give the same investment
decisions (whether to accept or reject a project). However...
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