![Like 2d
Imran Jahangir The higher IRR over cost of capital also highlights that there will be
positive NPV. But the question is how mush in quantum …..is it sufficient to satisfy the
expectation of shareholders/investors? There we need to see the bottom lin... Show more
Like 2d
Sukarnen Suwanto NPV ($) vs IRR (%) is not appletoapple comparison, even for
project ranking evaluation and analysis. Focus on NPV as that $ that will ultimately be going
to the company’s bank account.
Regarding IRR, much have been said. One notable person in this field is Prof. Carlo Alberto
Magni (note: I need to expressly mention his name for his amazing works in proving
incorrect concept of IRR. In addition, someone worthy of mentioning, Prof. Hazen in its
2003 paper published in the Engineering Economist). IRR or even MIRR (note: MIRR =
Meaningless Internal Rate of Return, mentioned in Principles of Finance by Brealey &
Myers) is “only” giving you correct stuff if you are dealing with calculating the return on your
bank savings. Why? Because IRR is a rate of return on implied interim values. Show less
4 2d
Sukarnen Suwanto Most of the project investments, especially real estate, their interim
values have real world variations in the market over project life that are not in many cases
the same with the interim values reflected in the project analysis spreadsheet. Prof. CA
Magni introduced his solution, called Average Internal Rate of Return (AIRR), which could
be simplified in formula into AIRR = Cost of Capital (COC) + [NPV of Cash Flows x
(1+COC)/NPV of the Interim Project Values].
To my surprise, IRR is still taught intensively in many business schools and I know of no
current corporate finance textbooks that do not follow it almost religiously. Probably,
because it is so easy and quick to show how much the IRR of a project investment, just
insert MS Excel formula, IRR (or additionally, MIRR) and here it is, in a blink of eyes, you
will see your IRR/MIRR. Albert Einstein once quoted saying that “Everything should be
made as simple as possible, but not simpler”, so true for IRR.
Show less
2 2d
Sandeep Khullar NPV and IRR, both discounting models are the most widely used
investment analysis and capital budgeting decision tools. They take into account the time
value of money phenomena. However, each method has its strengths and weaknesses
an... Show more
Like 2d
sevtap arslan NPV is the value of the project and necessary to compare with the absolute
funding amount of the project.IRR would give the return to compare any difference from the
funding cost, if one to one funding ,provided for. In this case both m... Show more
Like 2d
Emmanuel CUIGNET Both the IRR and NPV are mathematically the same. The IRR is the
rate that the drives the NPV to zero. If this IRR is above you WACC than go for it. By the
same token if your NPV is above your MCC and capex constraint than go for it....
Show more
Like 2 2d
Ian Macintyre To me these are both measures of a promise of financial outcomes, these
are just one measure that could/should be used to prioritise investment spend. Alignment to
strategy and assessment of capability to deliver are as important and sh... Show more
Like 2d
Manfred Haener Both are wrong if you do not earn money in the short term. NPV usually
is only generated in the residual value!
Like 2 2d
Andrew Lubliner I would suggest looking at NPV, IRR and Payback Period (as measured
in years). Please note that negative cash flows can have an adverse impact on IRR. A
project may have a positive NPV but if the payback period exceeds a threshold, would the
investment committee want to accept it?
Like 1d
H.H. Pablo Behrens Both are too complicated. Divide your CAPEX (of course including
WOC Change) by your forwardlooking EBITDAImprovement, then you'll get "years" which
you can balance vs your risk appetite.
Like 1d
Mathew Zachariah Both NPV and IRR are tools for making a judgement on the project
feasibility. There are many other factors also which need to be taken into consideration
before a final decision is taken.
Like 1d
Ken McDevitt I agree with Andrew. Any metric you use needs to be coupled with the
payback period. As we all know, the hockey stick effect can play havoc with financial
modeling.
Like 1d
George Bower Ken .... "traditional" payback or discounted payback? What do you think of
also showing the "Jcurve" (or hockey stick graph) to effectively reconcile payback,
discounted payback, IRR, and NPV?
Like 1d
Guillermo Martínez](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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NPV or IRR? (3) CFO Network LinkedIn Discussion
- 1. My Groups Discover Search Chief Financial Officer (CFO) Network The #1 Group for CFOs 301,518 members Member ABOUT THIS GROUP #1 group for CFOs and executive financial and accounting leaders. Connect with senior executives at Director, VP & CFO levels to network, discuss, or find accounting and CFO jobs. Tags: Finance, accounting, Chief Financial Officer, accountant, CPA, job, manager, managers, consultant, CPAs Group rules MEMBERS 301,518 members You La Trobe University Take the next step with La Trobe Join a university in Melbourne, the world's most liveable city Apply Online Now About Feedback LinkedIn Corp. © 2015 View previous comments Antany. A (B.Sc, ACCAUK, CASingapore) IRR is better than NPV technique because NPV is considered in the calculation of IRR. If NPV is giving you the figures, IRR pushes you to consider your cost of capital and your return rate which will make you satisfied with your decision. IRR is better. Like 1 4d Suren Panday CA, CGMA, MSc Whilst both methods are appropriate and perhaps IRR being slightly better , the short coming of these methods is that they do not factor in the risk element definitively. By this I mean the risk profile of each option could be different Like 2 4d Richard Huth In my eyes the discussion is falling one step short. As we are here taking it from a CFO's or Finance Management position and not a standard controlling position the starting question to evaluate an investment opportunity is: how and by ... Show more Like 1 4d Jiri Tuvora Well, IRR is not better than NPV, and I can argue as Antany for IRR, both are based on the same calculation and the result depends on the inputs. I use NPV as analytical tool and IRR for the result presentation. Generally both give us the same result but we have to consider all (4) situations where IRR fails. Like 4d Tom O. Mcanyango All other things equal,using IRR and NPV measurement to evaluate projects often result in the same finding. However there are a number of projects for which IRR is not effective as using NPV to discount cash flow.IRR major limitation... Show more Like 4d Chief Oye Akinsulire Oye Akinsulire (BSc, MBA, FCA). NPV is superior to IRR because it gives absolute measure of profitability which reflects in the shareholders wealth unlike IRR which gives relative measure of profitability. Additionally, for every... Show more Like 1 4d Srinivas Varanasi As per the initial question posed by Dr Jacques, while all above comments are relevant and worth by its own right, especially on the non financial / non quantifiable benefits projects are to be ranked, finance professionals are al... Show more Like 3 4d Guillermo Martínez Dear all The investment decision to launch a new product on the market, will be different from the assessment of the other company that decided to make a technological expansion or renovation of some investment. If investment is a m... Show more Like 1 3d Prem Thakur Great topic Dr. Jacques ! endless debate .... depends how smartly a CFO can use both of these tools to achieve business goal or Investor's confidence. Like 2d Imran Jahangir NPA and IRR both are the important tools the CFO use for financial analysis. It is very arguable that which measure is more effective than the other one. To my opinion, it is the context of the project, and issue of capital rationing ... Show more Dr. Jacques SaintPierre Adjunct Professor of Finance at Laval University & Board Advisor NPV or IRR? (3) NPV or IRR? (3) Having read so many absurdities about the NPV and the IRR, I thought it would be useful to present the following information. If your problem is to classify your projects in order of preference and that you does not have financial cons... Show more Like Comment 75 57 1w Invite others Privacy & Terms Home Profile Connections Jobs Interests Business Services Try Premium for free Advanced Search for people, jobs, companies, and more... 98 332
- 2. Like 2d Imran Jahangir The higher IRR over cost of capital also highlights that there will be positive NPV. But the question is how mush in quantum …..is it sufficient to satisfy the expectation of shareholders/investors? There we need to see the bottom lin... Show more Like 2d Sukarnen Suwanto NPV ($) vs IRR (%) is not appletoapple comparison, even for project ranking evaluation and analysis. Focus on NPV as that $ that will ultimately be going to the company’s bank account. Regarding IRR, much have been said. One notable person in this field is Prof. Carlo Alberto Magni (note: I need to expressly mention his name for his amazing works in proving incorrect concept of IRR. In addition, someone worthy of mentioning, Prof. Hazen in its 2003 paper published in the Engineering Economist). IRR or even MIRR (note: MIRR = Meaningless Internal Rate of Return, mentioned in Principles of Finance by Brealey & Myers) is “only” giving you correct stuff if you are dealing with calculating the return on your bank savings. Why? Because IRR is a rate of return on implied interim values. Show less 4 2d Sukarnen Suwanto Most of the project investments, especially real estate, their interim values have real world variations in the market over project life that are not in many cases the same with the interim values reflected in the project analysis spreadsheet. Prof. CA Magni introduced his solution, called Average Internal Rate of Return (AIRR), which could be simplified in formula into AIRR = Cost of Capital (COC) + [NPV of Cash Flows x (1+COC)/NPV of the Interim Project Values]. To my surprise, IRR is still taught intensively in many business schools and I know of no current corporate finance textbooks that do not follow it almost religiously. Probably, because it is so easy and quick to show how much the IRR of a project investment, just insert MS Excel formula, IRR (or additionally, MIRR) and here it is, in a blink of eyes, you will see your IRR/MIRR. Albert Einstein once quoted saying that “Everything should be made as simple as possible, but not simpler”, so true for IRR. Show less 2 2d Sandeep Khullar NPV and IRR, both discounting models are the most widely used investment analysis and capital budgeting decision tools. They take into account the time value of money phenomena. However, each method has its strengths and weaknesses an... Show more Like 2d sevtap arslan NPV is the value of the project and necessary to compare with the absolute funding amount of the project.IRR would give the return to compare any difference from the funding cost, if one to one funding ,provided for. In this case both m... Show more Like 2d Emmanuel CUIGNET Both the IRR and NPV are mathematically the same. The IRR is the rate that the drives the NPV to zero. If this IRR is above you WACC than go for it. By the same token if your NPV is above your MCC and capex constraint than go for it.... Show more Like 2 2d Ian Macintyre To me these are both measures of a promise of financial outcomes, these are just one measure that could/should be used to prioritise investment spend. Alignment to strategy and assessment of capability to deliver are as important and sh... Show more Like 2d Manfred Haener Both are wrong if you do not earn money in the short term. NPV usually is only generated in the residual value! Like 2 2d Andrew Lubliner I would suggest looking at NPV, IRR and Payback Period (as measured in years). Please note that negative cash flows can have an adverse impact on IRR. A project may have a positive NPV but if the payback period exceeds a threshold, would the investment committee want to accept it? Like 1d H.H. Pablo Behrens Both are too complicated. Divide your CAPEX (of course including WOC Change) by your forwardlooking EBITDAImprovement, then you'll get "years" which you can balance vs your risk appetite. Like 1d Mathew Zachariah Both NPV and IRR are tools for making a judgement on the project feasibility. There are many other factors also which need to be taken into consideration before a final decision is taken. Like 1d Ken McDevitt I agree with Andrew. Any metric you use needs to be coupled with the payback period. As we all know, the hockey stick effect can play havoc with financial modeling. Like 1d George Bower Ken .... "traditional" payback or discounted payback? What do you think of also showing the "Jcurve" (or hockey stick graph) to effectively reconcile payback, discounted payback, IRR, and NPV? Like 1d Guillermo Martínez
- 3. Guillermo Martínez If your problem is to classify your projects in order of preference and that you does not have financial constraints classification by decreasing amount. because a higher amount of financial resources for new invest, you have to cover greater compliance requirement by the way GLEN ARNOLD WROTE IN THE HANDBOOK OF CORPORATE FINANCE SAID " We can see why most firms use three or four measures when evaluating the return on a project. Payback, ARR and IRR provide alternative perspectives, and are useful for communicating project viability to a wide range of team members.However, the preferred method for the final decision must be NPV in a rationally managed, shareholder wealth oriented company" Show less Like 1d Sukarnen Suwanto You have the calculation spreadsheet for NPV (or IRR, PI, and/or Payback), yet there is a still a crucial question hanging there. At the board room, at the end of the day, is always coming down to “how much probability will we get that NPV?”. As said, nothing is a certainty, but the confidence needs to be there if the company wants to commit the money for something that is still at “expected” level. Monte Carlo simulation will surely help, yet many things in project is not always like “tossing a dice”, and not always “bell shape curve” distribution. Monte Carlo is probably appropriate for introducing new product to new territory, in which the company has no experience at all in the past. Show less 1 1d Matthew Williams Apart from the question of inputs in the cash flow (and see people double discounting by being over conservative here adjustments should be in discount rate or cash flow but not both) the issue of cyclicality needs to be dealt with... Show more Like 1 1d Dinyar Elavia IRR and NPV are both great tools... but IRR takes precedence when capital and other resources are scare, and rationing is required to allocate funds to the Best economic project Like 18h Mohamed El Sergani The minimum requirement is the 3 basic tools : NPV , IRR and Payback , each add value to the invetment decision and they don't substitute each other. Another important aspect is to develop sensitivity scenarios to ensure we are not... Show more Like 1 15h Pedro Placoná Payback. Like 6h Reply to this conversation...