Most Companies need to invest in wealth-creating assets in order to survive in the rapidly changing global business environment (Eljelly and Abuidris, 2001). The reason being is because capital investment functions to generate cash flows in years to come and also acts to uphold the profitability of existing business activities (Watson and Head, 2007). Normally, a company will need to use up a huge amount of cash outflows at the starting point of the projects. Later they will get cash inflows on the following years. Careful evaluation on the capital investment projects needs to be done, as it requires a huge sum of cash to be raised and invested. Furthermore, it will determine if the company is profitable in the future.
Decision on capital investment …show more content…
According to TO Wit, Yung and Sherman (1995), for obscure reasons the college professors favour NPV analysis compared with IRR analysis. Surveys show that evaluating potential investment is more appealing to lenders in terms of percentage of return than comparing NPV.
In the real world, IRR is prioritize more than NPV as it acts as an indicator of the profitability of the project and is more understandable to investors. In most cases, the result of NPV and IRR analyses are equal but the outcome of it may differ. This situation where both techniques produce different outcome is known as a conflict of the IRR and NPV methods.
In the case of NPV, it is measured in monetary terms that at the same time show the effectiveness of the project according to the discount rate. An investment project is evaluated based on the NPV method. Below are the criteria to determine whether it is a profitable investment using NPV method or otherwise: -
• where NPV > 0 – the investment project is considered effective at the discount rate d, i. e. the value of a business will increase upon implementing the …show more content…
No doubt, practitioners find the notion of a rate of return more intuitively compelling than the notion of the value being added for the investor (Evans and Forbes, 1993). Therefore, even when economic profitability might be better obtained in the form of a present value analysis, it is the IRR that is far more often favored. Even more so in the real estate arena, the IRR holds a sacred position with regard to decisions about acquisition, as well as choices between mutually exclusive investments. The IRR also predominates in terms of determining performance-based fees for real estate funds and ventures (Carey 2003; Altshuler & Schneiderman, 2011), and even has a larger role in performance measurement and attribution (Geltner, 2003) than is commonly seen with other asset classes, where time-weighted rate of return methods tend to predominate
Decision on capital investment …show more content…
According to TO Wit, Yung and Sherman (1995), for obscure reasons the college professors favour NPV analysis compared with IRR analysis. Surveys show that evaluating potential investment is more appealing to lenders in terms of percentage of return than comparing NPV.
In the real world, IRR is prioritize more than NPV as it acts as an indicator of the profitability of the project and is more understandable to investors. In most cases, the result of NPV and IRR analyses are equal but the outcome of it may differ. This situation where both techniques produce different outcome is known as a conflict of the IRR and NPV methods.
In the case of NPV, it is measured in monetary terms that at the same time show the effectiveness of the project according to the discount rate. An investment project is evaluated based on the NPV method. Below are the criteria to determine whether it is a profitable investment using NPV method or otherwise: -
• where NPV > 0 – the investment project is considered effective at the discount rate d, i. e. the value of a business will increase upon implementing the …show more content…
No doubt, practitioners find the notion of a rate of return more intuitively compelling than the notion of the value being added for the investor (Evans and Forbes, 1993). Therefore, even when economic profitability might be better obtained in the form of a present value analysis, it is the IRR that is far more often favored. Even more so in the real estate arena, the IRR holds a sacred position with regard to decisions about acquisition, as well as choices between mutually exclusive investments. The IRR also predominates in terms of determining performance-based fees for real estate funds and ventures (Carey 2003; Altshuler & Schneiderman, 2011), and even has a larger role in performance measurement and attribution (Geltner, 2003) than is commonly seen with other asset classes, where time-weighted rate of return methods tend to predominate