NPV

Question 1

1

Answer 1

it considers the time value of money (that is in the discount rate used)

Question 2

2

Answer 2

it gives an absolute figure not a percentage

Question 3

3

Answer 3

it considers the whole life of the project

Question 4

4

Answer 4

is based on real cashflows .

Question 5

4

Answer 5

It maximises the wealth of shareholders as this increases through receiving dividends and rising share prices.

Question 6

6

Answer 6

Positive NPV investments should increase the market value of the company by the amount of the NPV

Question 7

IRR 1

Answer 7

Does not produce an absolute figure (percentage only)

Question 8

IRR 2

Answer 8

Interpolation of the formula means it is only an estimate

Question 9

IRR 3

Answer 9

Fairly complicated to calculate

Question 10

IRR 4

Answer 10

Non conventional cashflows can produce multiple IRRs

Question 11

NPV VS IRR 1

Answer 11

NPV is often simpler to use. As mentioned earlier, IRR may require hunting for the discount rate that results in a net present value of zero.

This can be a very laborious trial-and-error process, although it can be automated to some degree using a computer spreadsheet.

Question 12

NPV VS IRR 2

Answer 12

A key assumption made by IRR is questionable. Both methods assume that cash flows generated by a project during its useful life are immediately reinvested elsewhere.

However, the two methods make different assumptions concerning the rate of return that is earned on those cash flow.

Question 13

NPV VS IRR 3

Answer 13

NPV assumes the rate of return is the discount rate

Question 14

NPV VS IRR 4

Answer 14

IRR assumes the rate of return is the internal rate of return on the project.

Question 15

NPV VS IRR 5

Answer 15

So, if the IRR is high, this assumption may not be realistic. It is more realistic to assume that cash can be reinvested at the discount rate - particularly if the discount rate is the company’s cost of capital. For example, by paying off the company’s creditors

Question 16

NPV VS IRR 6

Answer 16

In short, when NPV and IRR do not agree, it is best to go with NPV. Of the two methods, it makes the more realistic assumption about the rate of return that can be earned on cash flows from the project.