Case Study on Evaluation of Investment Projects In Case of Conflict Between the Internal Rate of Return and The Net Present value Methods

Case Study about Evaluation of Investment Projects In Case of Conflict Between the Internal Rate of Return and The Net Present value Methods

Abstract: Results obtained by employing the net present value (NPV) and the internal rate of return (IRR) methods allow to objectively determine the effectiveness and attractiveness of an investment project and to compare investment projects differing in scope, length or the amount of expected profit. While results obtained by the NPV and IRR methods normally correlate, contradictions are possible in individual cases. Such contradictions are called ‘conflict between the IRR and NPV methods’. The paper deals with the main characteristics of NPV and IRR, analysing the substance of the conflict and cases of its manifestation.

Introduction: The methods of net present value (NPV) and of internal rate of return (IRR) are among the ones most frequently employed in the evaluation of investment projects based on discounted cash flows. According to studies by different authors, the prevalence of these methods in practice varies from 70 to 100%. The methods have a universal character, strong methodological basis and broad application in the areas of both investment project evaluation and other areas such as business value or financial investments analyses. Somewhere, the degree of reliability of the methods is equal; therefore, sometimes only one of them is used, with the decision adopted on the basis of a single indicator.

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