Why does IRR and Payback periods gives different results? and would you prefer to use IRR...

Why does IRR and Payback periods gives different results? and would you prefer to use IRR or Payback period when deciding which project to go with?

(You can come up with your own projects and figures to answer this)

Solutions

Expert Solution

In the above example we see that while the first set of cash flows has higher IRR, the second set of cash flows have faster payback period ie 2 days vs 2.625 days. This signifies that two sets of cash flows can have two sets of decision making criteria.

Typically, IRR provides a better estimate of the project returns as it takes into consideration the entire set of cash flows for the project or investment. The payback period only considers the investment cash inflows till it is repaid. However, the decision to go for either is dependent on the management or the decision maker. If the decision maker is more interested in knowing when he is getting his returns , Payback period is a better measure while if he is evaluating the overall investment criteria, IRR is a more apt measure.

jeff jeffy answered 1 year ago

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