what is NPV and IRR need an xplanation

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what is NPV and IRR need an xplanation

Dec 19th, 2014

Net Present Value is the difference between the present value of cash inflows and the present value of cash outflows. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account.

(IRR) is the discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

Reference:

http://www.investopedia.com/walkthrough/corporate-finance/4/npv-irr/introduction.aspx

For example if $800 is inflow for three years and 6% is the rate of discount and if$2000 is initial investment,

then PV = $2138.41 and NPV =$138.41

This is calculated as follows: -2000+800/(1.06)+800/(1.06^2)+800/(1.06^3)

IRR for a stream of cash flows -1800, 500,800,900 is 9.77%

This is obtained as the solution of

1800 =500/(1+r)+800/(1+r)^2+900/(1+r)^3

Dec 19th, 2014

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Dec 19th, 2014
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Dec 19th, 2014
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