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Presentation forfinancial management
and policy
“Conflicts Between NPV And IRR Results”
PALLAVI RANI
Conflicts Arises
• In case of mutually exclusive investment proposals, which
compete with one another in such a manner that acceptance
of one automatically excludes the acceptance of other, the
npv method and irr method may give contradictory results.
• The NPV may suggest acceptance of one proposal whereas
the IRR may favour another proposal.
Causes Of Such Conflicts
a) Significant differences in the size[amount] of cash outlay of
various proposals under consideration.
b) Problem of difference in the cash flow pattern or timings of
various proposals.
c) Differences in service life or unequal expected lives of the
projects.
Best Selection In Case Of
Conflicts
• In such cases, while choosing among mutually
exclusive projects, one should always select the project
giving the largest positive NPV using appropriate cost
of capital.
Reason for choosing largest
positive NPV value
• The project with largest NPV has the most beneficial
effect on share price and shareholders' wealth.
• The objective of firm is to maximize shareholders
wealth.
Conclusion
• “ the NPV method is more reliable as compared
to the IRR method in ranking the mutually
exclusive projects.”
THANKS

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Pallavi rani

  • 1. Presentation forfinancial management and policy “Conflicts Between NPV And IRR Results” PALLAVI RANI
  • 2. Conflicts Arises • In case of mutually exclusive investment proposals, which compete with one another in such a manner that acceptance of one automatically excludes the acceptance of other, the npv method and irr method may give contradictory results. • The NPV may suggest acceptance of one proposal whereas the IRR may favour another proposal.
  • 3. Causes Of Such Conflicts a) Significant differences in the size[amount] of cash outlay of various proposals under consideration. b) Problem of difference in the cash flow pattern or timings of various proposals. c) Differences in service life or unequal expected lives of the projects.
  • 4. Best Selection In Case Of Conflicts • In such cases, while choosing among mutually exclusive projects, one should always select the project giving the largest positive NPV using appropriate cost of capital.
  • 5. Reason for choosing largest positive NPV value • The project with largest NPV has the most beneficial effect on share price and shareholders' wealth. • The objective of firm is to maximize shareholders wealth.
  • 6. Conclusion • “ the NPV method is more reliable as compared to the IRR method in ranking the mutually exclusive projects.”