Question F [2]
The NPV method is slightly more advantages as being compared to the IRR method. Both has its own pros and cons; however, the cons of the IRR method weighs heavier and drastically. The heavy catch is that discount rates almost usually change significantly over a period of time, and the IRR method is solely based upon one internal rate of return. Not only that, the basic IRR calculation is completely ineffective when it is evaluating a project with a mixture of multiple positive and negative cash flows. In this case, a single internal rate of return [IRR] cannot possibly be used. IRR is the discount rate that makes a project break even, in the first place. If the market changes its condition over a period of time, this project can have two [or more] IRRs, which is a disaster.
NPV and IRR usually have the same acceptance or rejection decisions for projects that are independent; so IRR can just as well be used alongside NPV when independent projects are being evaluated. The conflict only appears when the projects are mutually exclusive.
Question G [1]
The modified internal rate of return [MIRR] is the modification of the internal rate of return [IRR] and it aims to solve the shortcomings or problems in relation with the internal rate of return [IRR]. The true definition of MIRR is, the discount rate that compares present value …show more content…
Both may have contradicting results or findings. This usually happens in smaller sized projects— where they often have a high value of MIRR, but a low value of NPV; as being compared to larger sized projects. Based on this, MIRR is not a good alternative for the NPV; and still, NPV endures being the best rule for making a decision. The MIRR is a far more superior as compared to the IRR, because the MIRR solve the shortcomings or problems in relation with the IRR; and thus, MIRR should be used instead of
The NPV method is slightly more advantages as being compared to the IRR method. Both has its own pros and cons; however, the cons of the IRR method weighs heavier and drastically. The heavy catch is that discount rates almost usually change significantly over a period of time, and the IRR method is solely based upon one internal rate of return. Not only that, the basic IRR calculation is completely ineffective when it is evaluating a project with a mixture of multiple positive and negative cash flows. In this case, a single internal rate of return [IRR] cannot possibly be used. IRR is the discount rate that makes a project break even, in the first place. If the market changes its condition over a period of time, this project can have two [or more] IRRs, which is a disaster.
NPV and IRR usually have the same acceptance or rejection decisions for projects that are independent; so IRR can just as well be used alongside NPV when independent projects are being evaluated. The conflict only appears when the projects are mutually exclusive.
Question G [1]
The modified internal rate of return [MIRR] is the modification of the internal rate of return [IRR] and it aims to solve the shortcomings or problems in relation with the internal rate of return [IRR]. The true definition of MIRR is, the discount rate that compares present value …show more content…
Both may have contradicting results or findings. This usually happens in smaller sized projects— where they often have a high value of MIRR, but a low value of NPV; as being compared to larger sized projects. Based on this, MIRR is not a good alternative for the NPV; and still, NPV endures being the best rule for making a decision. The MIRR is a far more superior as compared to the IRR, because the MIRR solve the shortcomings or problems in relation with the IRR; and thus, MIRR should be used instead of