Unformatted text preview: for an investment
project lasting T years by solving: (24) NPV Co C1
1 IRR 1 IRR 1 IRR T 0 The IRR investment rule accepts projects if the project's IRR exceeds the opportunity
cost of capital, i.e. when IRR > r. Finding a project's IRR by solving for NPV equal to zero can be done using a financial calculator,
spreadsheet or trial and error calculation by hand.
Mathematically, the IRR investment rule is equivalent to the NPV investment rule. Despite this the IRR
investment rule faces a number of pitfalls when applied to projects with special cash flow characteristics. Download free ebooks at bookboon.com
25 Corporate Finance 1. 2. 3. 4. The net present value investment rule Lending or borrowing?
- With certain cash flows the NPV of the project increases if the discount rate
increases. This is contrary to the normal relationship between NPV and discount rates
Multiple rates of return
- Certain cash flows can generate NPV=0 at multiple discount rates. This will happen
when the cash flow s...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12