Advantages and Disadvantages of NPV and IRR
In any organization, NPV and IRR often use as the tool to examine whether to approve any project and future strategies planning in an organization. However, both of the methods are not absolute to the best as both of the methods have their advantages and disadvantages.
NPV techniques measure each contribution to the investors however the drawback of the method is unable to measure the project size. With the IRR technique, the benefit is that it reveals the return on the initial cash spent, the drawback is that, sometimes, it could offer you clashing responses when as compared to NPV for equally unique jobs. The ' multiple IRR trouble' could likewise be a problem, as reviewed listed below.
The multiple IRR problems happens when the task is running at a loss or the company would require additional capital, it means while the running of the project the cash flow of the company is negative. This is called a "non-normal cash flow", and such capital will certainly offer several IRRs. In the Pitlochry Polymers’s case, IRR method is not suitable due to this project do not generate positive cash flow.
When the assignment is independent exclusive, therefore the …show more content…
Changing of capital structure in the company will impact the WACC calculation for e.g. company intend to raise more debt instead of equity and the WACC rate will be lower and the total NPV will be increase. Consequently, the management need to be maintain the capital structure at the desire level in order to make the project to be success. There is important of the cash flow generate from the project that NPV calculation are sensitive to the cash flow input of each year. If there is change or increase of the expenses in employee salary or production expenses, it will lower the total NPV and make the project become
In any organization, NPV and IRR often use as the tool to examine whether to approve any project and future strategies planning in an organization. However, both of the methods are not absolute to the best as both of the methods have their advantages and disadvantages.
NPV techniques measure each contribution to the investors however the drawback of the method is unable to measure the project size. With the IRR technique, the benefit is that it reveals the return on the initial cash spent, the drawback is that, sometimes, it could offer you clashing responses when as compared to NPV for equally unique jobs. The ' multiple IRR trouble' could likewise be a problem, as reviewed listed below.
The multiple IRR problems happens when the task is running at a loss or the company would require additional capital, it means while the running of the project the cash flow of the company is negative. This is called a "non-normal cash flow", and such capital will certainly offer several IRRs. In the Pitlochry Polymers’s case, IRR method is not suitable due to this project do not generate positive cash flow.
When the assignment is independent exclusive, therefore the …show more content…
Changing of capital structure in the company will impact the WACC calculation for e.g. company intend to raise more debt instead of equity and the WACC rate will be lower and the total NPV will be increase. Consequently, the management need to be maintain the capital structure at the desire level in order to make the project to be success. There is important of the cash flow generate from the project that NPV calculation are sensitive to the cash flow input of each year. If there is change or increase of the expenses in employee salary or production expenses, it will lower the total NPV and make the project become