Question

Hari is a project consultant. While performing the capital budgeting he is puzzled by the fact, that the two measures of NPV & IRR is giving two differing results? Hari wants you to explain him precisely the difference between these two and advise him to go with a single measure, which would be your answer?

Answer 1

The difference between NPV and IRR lies in the calculation method and interpretation of the results. NPV considers the time value of money, while IRR focuses on the discount rate. NPV is generally considered more reliable and widely used.

Step-by-step explanation:

The difference between NPV (Net Present Value) and IRR (Internal Rate of Return) lies in the calculation method and interpretation of the results. NPV is calculated by discounting each cash flow of a project to its present value and then subtracting the initial investment. A positive NPV indicates that the project is profitable. On the other hand, IRR is the discount rate at which the present value of the project's cash flows equals zero. If the IRR is higher than the required rate of return, the project is considered good. As for which measure to rely on, NPV is generally considered more reliable and widely used, as it takes into account the time value of money and provides an absolute value of the project's profitability.