Communiquez avec les autres et partagez vos connaissances professionnelles

Inscrivez-vous ou connectez-vous pour rejoindre votre communauté professionnelle.

Suivre

How Internal Rate of Return (IRR) and Net Present Value (NPV) are related to each other? Which of this two criteria is more reliable and when?

user-image
Question ajoutée par Bekhruz Nurnazarov , Property Consultant , AZIZI DEVELOPMENTS
Date de publication: 2016/06/10
Nadeem Ahmed
par Nadeem Ahmed , Senior Accountant , Mouawad MENA DMCC

NPV & IRR are related by an equation. IRR is the rate at which NPV is 0.

When you have two mutually exclusive project (where acceptance of one project means rejection of other project) and both NPV and IRR give conflicting results, we should use NPV method to determine which project add more value to the business.

Hence NPV is more reliable when you have mutually exclusive projects and both the methods give conflicting results.

In case of Independent projects, any method can be used. Criteria for NPV method is -

Accept if NPV > 0 , Reject if NPV <= 0

Criteria for IRR method is -

Accept if IRR > Cost of Capital, Reject if IRR <= Cost of Capital

Rodelio Oandasan
par Rodelio Oandasan , Accountant , Master and Tailor

 

IRR and NPV  are both methods primarily use in forecasting capital budgeting. 

More Questions Like This