FIN622 GDB.1 Idea Solution by Asad Munir
NPV and IRR ConflictConflicts between NPV and IRR can arise in numerous circumstances: different lives, different sizes, different risk factors, or different timing of cash flows. The underlying cause of the conflict resides in the assumption of cash flow reinvestment. The process of discounting and time value of money is predicated on interest compounding and discounting is predicated on what discount rate is chosen. In IRR calculation, the implied interest rate of reinvestment of cash flows is IRR itself. In NPV calculation, it is the discount rate. Which of the two methods is correct depends on the choice of what is a more realistic rate of reinvestment of cash flows: IRR or discount rate. Most often the reinvestment opportunities that a company has are those that can earn its weighted average cost of capital, because it is what its projects earn on average. Relying on an assumption of weight average cost of capital as the reinvestment opportunity is also more conservative. Thus, NPV is most often the safest basis for decision.
But that may not be always the case. For instance, choosing projects that have positive NPV implies that they earn a higher return than risk adjusted cost of capital. This implies that we expect opportunities for reinvestment of cash flows at higher rates. Higher rates of return can also be required when future inflation is anticipated. To investigate the impact of cash flow reinvestment opportunity, advanced textbooks in financial management recommend calculating an adjusted NPV and an adjusted IRR. These are obtained by first calculating a terminal value which is the future value of cash flows compounded at the opportunity rate of reinvestment calculation of future value). Then the terminal value is discounted to the present using the weighted average cost of capital. Thus the adjusted NPV is given by
Adjusted NPV = - I0 + (Ct(1+k0)t ) * ((1 + kc )n – 1) / kc
where I0 = initial outlay
Ct = cash flows
k0 = opportunity rate of reinvestment
kc = weighted average cost of capital
t = time period
n = length of project
Likewise, the adjusted IRR is given by
Adjusted IRR = x where I0 = (Ct(1+k0)t ) * ((1 + x )n – 1) / x
By using the same rate of reinvestment of cash flows for NPV and IRR removes the conflict between NPV and IRR. The additional steps required in the calculation of adjusted NPV and IRR are not intuitively appealing. The complexity of the procedure makes it rather unpopular, and as long as conservative rates of reinvestment are used the results merely confirm the conclusion reached with the unadjusted NPV. This gives even more reason to rely on ordinary NPV. Also keep in mind the rough estimates often used in cash flow projections: the theoretical complexity seems somewhat remote from reality.
On Fri, Apr 22, 2011 at 8:41 AM, mc090404660 Ifra Mehrar Khan <mc090404660@vu.edu.pk> wrote:
plz send me the idea soluution of
Fin622 gdb
Usually NPV and IRR techniques of project evaluation leads to the same ranking for given projects and make the decision to undertake project relatively simple. But sometimes it does happen that a ranking conflict arises by using both techniques i.e. both techniques provide contradictory ranking of given projects.
You are required to discuss the circumstances when NPV and IRR lead to a ranking conflict for two projects?
2011/4/16 ∂υα ωαqαя <dua4566@gmail.com>Semester "Spring 2011"
MKT501 GDB IDEA SOLUTION BY DUA WAQAR
Vu Askari Team
http://www.vuaskari.comAnswer:
Now a day's technological factor of broad environment is changing very rapidly. You know that broad environment is uncontrollable. How technological environment can create opportunities for grocery store?
The technological environment refers to new technologies, which create new product and market opportunities. Organizations need to be aware of new technologies in order to turn these advances into opportunities and a competitive edge. Technology can affect many aspects of our lives, in a grocery store technology can change the way customers take their groceries, how the cashier can total up the price of the groceries and how the owner can take note of the items sold and how much more goods he has to order. It speeds up the process from where the buyer takes the goods to when the cashier totals up the amount of the cash the goods are worth
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