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what is the difference between npv and irr method of capital
budgeting and which one is better?
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Answer Posted / rahul singh lamba
IRR measures the 'max return potential' implied in a
project without considering funding costs (hence the
term 'Internal'). While it is a useful guideline, it fails
in comparison to NPV as the latter incorporates funding
costs as well. NPV will be turn positive only when the IRR
> WACC! Secondly, IRR (the same as CAGR) assumes that the
reinvestment rate of returns is the same as the IRR itself
(that is, it involves circularity. The very reason why we
start with arbitrary numbers to derive the answer when
doing manual calculations).
In general, the order of preference should be NPV >> MIRR
>> IRR
Read this article for more
http://finaticsonline.com/blog/2010/11/npv_vs_irr_vs_mirr/
| Is This Answer Correct ? | 17 Yes | 2 No |
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