Internal rate of return and net present value are related in that: Internal rate of return...

Internal rate of return and net present value are related in that:

Internal rate of return formed the basis for the eventual development of the net present value theory.
Internal rate of return finds a discount rate that produces a net present value of zero.
Net present value formed the basis for the eventual development of the internal rate of return theory.
Net present value can only be used to evaluate irregular cash flows, whereas internal rate of return can only be used to evaluate normal (always positive) cash flows

Solutions

Expert Solution

Answer is Option b i.e. Internal Rate of Return (IRR) and Net Present Value (NPV) are related in that Internal Rate of Return finds a discount rate that produces a net present value of zero.

Because IRR provides the return of an investment calculated as a percentage whereas NPV provides the return of an investment in monetary terms.

Decision on the basis of NPV and IRR is taken as follows.

Condition	Decision
Cost of Capital (k) > Internal Rate of Return (r)	Reject the project
Cost of Capital (k) = Internal Rate of Return (r)	Indifferent
Cost of Capital (k) < Internal Rate of Return (r)	Accept the project

Similarly, in case of NPV, NPV > 0 Accept the proposal ; NPV = 0 Indifference point ; NPV < 0 Reject the proposal

IRR is the discount rate at which NPV is zero. So, any rate at which NPV is greater than 0 will provide a positive NPV and a project with a positive NPV is considered profitable since the cost is recovered at that rate and additional profits can be earned.

For any query or clarification, please leave a comment.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

PAYBACK, ACCOUNTING RATE OF RETURN, PRESENT VALUE, NET PRESENT VALUE, INTERNAL RATE OF RETURN All four...

PAYBACK, ACCOUNTING RATE OF RETURN, PRESENT VALUE, NET PRESENT VALUE, INTERNAL RATE OF RETURN All four parts are independent of all other parts. Assume that all cash flows are after-tax cash flows: a. Randy Willis is considering investing in one of the following two projects. Either project will require an investment of $10,000. The expected cash flows for the two projects follow. Assume that each project is depreciable. Year Project A Project B 1 $ 3,000 $3,000 2 ...

What is the relationship among present value, net present value, and internal rate of return? Is...

What is the relationship among present value, net present value, and internal rate of return? Is there a consistent relationship at all possible values for these measures?

What is the internal rate of return, net present value with a 10% interest rate, and...

What is the internal rate of return, net present value with a 10% interest rate, and net present value with a 20% interest rate of this project. The cash flows are as follows: Year 0 - Initial investment - 20,000 (make sure to make investments negative values in Excel cash flow) Year 1 - 8,000 Year 2 - 8,000 Year 3 - 9,000 Year 4- 12,000 No value after year 4.

What is the Net Present Value? What is the Internal Rate of Return? What is the...

What is the Net Present Value? What is the Internal Rate of Return? What is the Payback Period?

What are the differences in the calculations of net present value and internal rate of return

If you compare the internal rate of return to the net present value, the IRR is...

If you compare the internal rate of return to the net present value, the IRR is more reliable when you are evaluating mutually exclusive projects. the IRR is easier to apply when the cash flows are non-normal. they are very similar because the IRR is the discount rate that makes the NPV equal to one. will provide the same accept or reject answer unless you have scale differences between projects. will provide the same accept or reject answer if you...

PAYBACK, ACCOUNTING RATE OF RETURN, NET PRESENT VALUE, INTERNAL RATE OF RETURN Ripit Company wants to...

PAYBACK, ACCOUNTING RATE OF RETURN, NET PRESENT VALUE, INTERNAL RATE OF RETURN Ripit Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors The outlay required is $480,000. The NC equipment will last five years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Year Cash Revenues Cash Expenses 1 $780,000 $600,000 2 780,000 600,000 3 780,000 ...

Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Follow the format shown...

Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Follow the format shown in Exhibit 14B-1 and Exhibit 14B-2 as you complete the requirements below. Booth Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors. The outlay required is $960,000. The NC equipment will last 5 years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Year Cash Revenues...

Net Present Value and Internal Rate of Return. Below are the projected revenues and expenses for...

Net Present Value and Internal Rate of Return. Below are the projected revenues and expenses for a new clinical nurse specialist program being established by your healthcare organization. The nurses would provide education while patients are in the hospital and home visits are on a fee-for-service basis after patients have been discharged Should the hospital undertake the program if its required rate of return is 12%? Note: it must be assumed that the revenues and costs in this problem represent...

What are the advantages of using net present value and internal rate of return methods to...

What are the advantages of using net present value and internal rate of return methods to evaluate capita budgeting decisions instead of the payback period?

Subjects