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In what ways can the IRR make you give a flawed decision and what relationship the...

In what ways can the IRR make you give a flawed decision and what relationship the NVP have with the IRR?

Solutions

Expert Solution

Internal rate of return(IRR) is the at which present value of cash inflows equals to the initial cash outlay. At IRR, the NPV of the project is Zero.

Decision Rule of IRR: If IRR is greater than required return then project is acceptable. Higher the better.

But, IRR is some times misleading specially in case multiple of IRR of the project. In case of unconventional cash flows which means direction of cash flows during project life changes twice or more than there is chance that project has multiple IRR.

IRR analysis is useless in case multiple IRR project.

Relationship between NVP and IRR

NPV of Project discounted at IRR is always zero. If IRR is greater than required rate of return then NPV would be positive and If IRR is less than required rate of return then NPV would be negative.

jeff jeffy answered 7 months ago
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