Financial lec 4 - capital investment appraisal continued Flashcards
fpayback is the intial
screning emthod
which invetmnt pparasial cannoy eb used alone
payback
when do NPV and IRR give the same result
singel investment project
convetional cashflow
if cashflow is single investment project with conventional cashflow is NPV is +ve IRR will be
bigger than required cost of cpaital
for single investmetn with convenitona lcashflow project if NPV is -ve what will IRR be
less than required rate/cost of capital
when can we not use ITRR and NPV to get same answer
mutually exclusive prokect - chosing one means not choosing the others
project got unconventional cashflow
discount rate changes during prokect life - doesnt apply to this unit
what does irr assume about reinvestment
any +ve cashflow canbe reinvested elsewheere to earn a return equal to the IRR of the original project
why is the irr asumption about reinvestmetn unrealistic
there are not unltd/many opportunities avaiable for the compnay to get exact same return as 1 project for the other project - i.e projects canbe unrelated so no reason to assume they will yield the same return
in most cases when get +ve IRR is bigger than cost of capital which for most firms is 10%
what does NPV assume about reinvestment
any cashflows gernated during the life of project
reinvested at the cost of capital
why is the NPV reinvestment assumption realistic
assumes other investment opps vaiable to firms and also gives them cost of capital on avg on return
its got a min expected ROR so theyll only take projects where they make am min expectd ror
why is NPV the preferred method of investment appraisal
you might end up with multiple IRRs which is very unhelpful
due to th ereinvestment assumption how is the IRR and NPV seen in comparison to each other
irr - unrealistic and problematic
NPV - more sensible
when do we only use NPV
When got
mutually exclusive orkect
varied discount rates
unconventional cf
