NPV, IRR and Cash Payback Method

Feb 3rd, 2012
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There are several things that make the application of Net Present Value (NPV) in venture valuation, more desirable than Internal Rate of Return (IRR). The first element is that NPV provides results in currency form, thus presents a direct answer to project valuation (Price, 2011). IRR on the other hand expresses the venture value in terms of the returns attainable from that particular capital project.

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NPV, IRR and Cash Payback Method PaperStudent's NameProfessor's NameAffiliationDateNPV, IRR and Cash Payback MethodAdvantage of NPV over IRRThere are several things that make the application of Net Present Value (NPV) in venture valuation, more desirable than Internal Rate of Return (IRR). The first element is that NPV provides results in currency form, thus presents a direct answer to project valuation (Price, 2011). IRR on the other hand expresses the venture value in terms of the returns attainable from that particular capital project. Second factor, NPV is preferred by most business entities because of its ability to compute additional wealth, unlike IRR (Price, 2011).Thirdly, NPV is applicable in situations where a venture experiences variations in cash flows (outflows and inflows); IRR is not suitable for venture valuation in cases where cash flows fluctuate. The fourth advantage is that NPV does not provide misleading information about venture profitability (Price, 2011). IRR can create conclusion that a short-term investment is more lucrative than a long-term investment that has a predictably higher yield. The last advantage is NPV creates room for venture improvement; NPV provides different recommendations depending on the discount rate used. IRR provides the same recommendations even when subjected to varying conditions (Price, 2011). Cash Payback MethodUnder the cash payback method the suitability of a project is not evaluated on the basis o

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