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Asked by Maegan Neuman on May 05, 2024

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When can IRR and NPV give different results? Explain how this can happen.

IRR

Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of investments, indicating the annualized rate of return that sets the net present value of all cash flows (both positive and negative) from a particular project equal to zero.

NPV

Net Present Value; a method used to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and outflows.

  • Familiarize oneself with the idea of Net Present Value (NPV) and its role in the analysis of projects.
  • Understand the basic principles of the Internal Rate of Return (IRR) and Modified Internal Rate of Return (MIRR), along with the distinctions between them.
  • Recognize the significance of reinvestment assumptions in the appraisal of project evaluation techniques.
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ZK
Zybrea KnightMay 08, 2024
Final Answer :
NPV and IRR can give conflicting results for mutually exclusive decisions when the projects' NPV profiles cross in the first quadrant of the (k, NPV) plane. There is no possibility of such a conflict for stand-alone decisions. Examination of a down sloping NPV profile shows that IRR>k always implies a positive NPV and IRR


NPV and IRR can give conflicting results for mutually exclusive decisions when the projects' NPV profiles cross in the first quadrant of the (k, NPV) plane. There is no possibility of such a conflict for stand-alone decisions. Examination of a down sloping NPV profile shows that IRR>k always implies a positive NPV and IRR

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