Question

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If the NPV<0 discounted at ARR, is the IRR greater than or less than the ARR?...

If the NPV<0 discounted at ARR, is the IRR greater than or less than the ARR? Defend your answer. If the IRR is greater than the ARR, what does the difference between the two account for?

Expert Solution

Ans- NPV <0 Means NPV is negative discounted at ARR.it means present value of cash inflows is less than present value of cash outflows.therefore our expected return or cost of capital is higher then it returns.

IRR means at which there is no profits or loss of investment.

At NPV = 0

therefore at IRR discounted rate is equilibrium rate.

So,if at NPV<0

IF IRR>ARR it means we incurred some loss. We need to improve cash inflows or decrease cost of capital burden.

If IRR<ARR it means we have profits .

What is IRR when NPV

Internal rate of return (IRR)- is a capital budgeting method To estimate the Profitability of a potential investment.The internal rate of return Is a discount rate that make NPV of all cash flows from particular project equal to zero.

I.e, Present value of cash inflows - present value of cash outflows = 0

NPV formula

NPV= Present value of cash inflows - present value of cash outflows

Seeing above formula we derive

At IRR. NPV = 0

at IRR we have no negive or positive NPV it equal to zero

If IRR >cost of capital then accept the project

IRR<cost of capital then rejects the project

jeff jeffy answered 1 year ago

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