Scribd
Upload
79 views7 pages

Net Present Value (NPV) & Internal Rate of Return (IRR) : Round 3 Submission - Sajal Gupta

This document discusses Net Present Value (NPV) and Internal Rate of Return (IRR), two metrics used to evaluate capital budgeting decisions and investments. NPV considers the present value of all future cash flows of a project, including the initial investment, while IRR is the discount rate that results in an NPV of zero. The document provides examples of how to calculate IRR and compares NPV and IRR, noting that NPV is generally preferred as it measures wealth creation and considers project size, while IRR may have multiple or zero solutions.

Uploaded by

Sajal Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
79 views7 pages

Net Present Value (NPV) & Internal Rate of Return (IRR) : Round 3 Submission - Sajal Gupta

This document discusses Net Present Value (NPV) and Internal Rate of Return (IRR), two metrics used to evaluate capital budgeting decisions and investments. NPV considers the present value of all future cash flows of a project, including the initial investment, while IRR is the discount rate that results in an NPV of zero. The document provides examples of how to calculate IRR and compares NPV and IRR, noting that NPV is generally preferred as it measures wealth creation and considers project size, while IRR may have multiple or zero solutions.

Uploaded by

Sajal Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 7

Net Present Value (NPV) & Internal Rate of Return (IRR)

Round 3 Submission – Sajal Gupta


Why study NPV
and IRR?
 Capital budget planning, e.g.
 Choosing between investments
 Deciding whether to fund new
projects

 NPV and IRR are metrics used to


compare the valuation of alternative
cash flows over time.
Net Present Value
(NPV)

Net present value (NPV) is a method used to determine the current


value of all future cash flows generated by a project, including the
initial capital investment.
NPV Decision Rule
Internal Rate of
Return (IRR)

The internal rate of return (IRR) is a metric used in capital budgeting to


estimate the profitability of potential investments. The internal rate of
return is a discount rate that makes the net present value (NPV) of all
cash flows from a particular project equal to zero.
You can purchase a building for $375,000. The investment will generate
$25,000 in cash flows (i.e. rent) during the first three years. At the end of
three years you will see the building for $450,000. What is the IRR on the
investment ?

Let’s try
NPV vs IRR
NPV is preferred over IRR -

 NPV measures the wealth created today from an


investment today. This is the goal of management.

 IRR does not account for the size of the project


 If money costs 10% , it is better to earn 12%
on a million dollar project than 12% on a
$1000 project

 IRR is not uniquely determined


 IRR may have multiple solutions
 IRR may also have zero solutions

You might also like