Professional Documents
Culture Documents
ID : MA0N0219
Contents
IRR ( INTERNAL RATE OF RETURN)
NPV ( NET PRESENT VALUE)
CASE
CONCLUSION
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IRR
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IRR (Condt)
Formula:
CF0 + CF1/ (1+r)1+ CF2/ (1+r)2+ CF3/ (1+r)3++
CFn/ (1+r)n = 0
Where:
IRR : denoted by r
CF: cash flow
If IRR > = r Accept the project
If IRR < r Reject the project
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IRR (Condt)
The advantage :
- The target IRR is used to describe the
attractiveness of the project because the IRR is an
indicator reflects the profitability of the project,
one hand it expresses the interest rate that the
project brings on invested capital, on the other
hand it shows the maximum interest loan rate
which the project can accept it.
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IRR (Condt)
Disadvantage:
- The application of this criterion may not be
accurate if the account exists to balance negative
cash flows (NCF) significantly during project
operation. At that time the projects NPV will
change sign several times when it discounted at
various discount rates and whenever it changes
mark leads to a different IRR was determined that
we do not know what is the proper value for the
assessment
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NPV
NPV is the sum present value of the net income
that the project brings in its life cycle. In other
words, NPV is used in capital budgeting to analyze
the profitability of an investment or project.
Formula :
NPV = Ct/ (1+r)t C0
- If NPV > = 0 Accept the project
- If NPV < 0 Reject the project
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Cash Flow
-$725,000,000
90,000,000
135,000,000
180,000,000
245,000,000
232,000,000
170,000,000
120,000,000
95,000,000
-80,000,000
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CONCLUSION :
The IRR is the discount rate that makes the
estimated NPV of an investment equal to zero; it is
sometimes called the discounted cash flow (DCF)
return. The IRR rule is to take a project when its
IRR exceeds the required return. IRR is closely
related to NPV , and it leads to exactly the same
decisions as NPV for conventional, independent
projects.
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CONCLUSION (Contd)
When project cash flows are not conventional ,
there may be no IRR or there may be more than
one. More seriously, the IRR can not be used to
rank mutually exclusive projects; the project with
the highest IRR is not necessarily the preferred
investment.
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