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What is NPV? What is IRR? What is the difference between NPV
and IRR method? Which and why among NPV and IRR do you think
is more appropriate technique in capital budgeting?
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Answer Posted / manoj
NPV is the Net Present Value . It is the summation of
present values of future cash flows less the present value
of cash outflow. This method takes into accoutn the time
value of money. Generally present value of cash outflow is
determined by multiplying with the discounting factor which
is the cost of capital of the company.
IRR is the Internal rate of return . It is the rate at
which the PV of Inflow is equal to the PV of outflow.
If IRR is positive then we can go with the project else
ditch it.
For capital budgeting decisions a mix of techniques is
used. No single method is accurate enough.
| Is This Answer Correct ? | 74 Yes | 16 No |
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