- Sometimes, according to IRR method you should select one project whereas accor
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- Sometimes, according to IRR method you should select one project whereas according to NPV method another project should be selected. Why does such controversial results occur? Explain. - Sometimes, according to IRR method you should select one project whereas according to NPV method another project should be selected. Why does such controversial results occur? Explain. - Sometimes, according to IRR method you should select one project whereas according to NPV method another project should be selected. Why does such controversial results occur? Explain.Explanation / Answer
NPV and IRR, both provide criteria for selection of projects. NPV or net present value provides us with the money amount of value added or deducted by undertaking a certain project. IRR gives us the rate of return of the project, Both NPV & IRR uses the time value of money concept. Each of these measure has its own advantages and disadvantages. Sometimes, the conclusion drawn from using NPV and IRR will not agree. Sometimes a project can have positive NPV but the IRR is lower than the required rate of return. Such controversies of NPV and IRR arises because of the basic assumptions of cashflow distribution. IRR assumes that any cashflow arising out of the project would be reinvested at IRR. NPV on the other hand assumes that cashflows would be invested at the cost of capital. NPV therefore, is a more conservative and realistic measure. NPV is also dependent on the size of the project whereas, IRR is independent of the size of project.
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