Question

QUESTION: Although differences in the magnitude and timing of cash flows explain conflicting rankings under the NPV and IRR techniques, the underlying cause is the implicit assumption concerning the reinvestment of the intermediate cash inflows.

ture or false with an explaintion. Minimum words 200

Answer 1

Answer : This statement is true

Explanation :

NPV : Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows, using cost of capital as discounting rate. NPV is expressed as $ value project with higher NPV is preferred compared to project with lower net present value . NPV assume that intermediate cash flow re-invested in the project at the rate used for discounting the cash flow.

Internal rate of return IRR : is the discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. IRR is expressed as %age . IRR assume that intermediate cash flow re-invested in the project at the rate used for discounting the cash flow.

Difference : NPV and IRR are the two most common parameters used by the companies to decide, which investment proposal is best. However, in a certain project, both the two criterion give contradictory results, i.e. one project is acceptable if we consider the NPV method, but at the same time, IRR method favors another project. The reasons of conflict amidst the two are due to the variance in the inflows, outflows, and life of the project.