Right so mutually exclusive projects and independant projects… What are the rules between the two methods and potential conflicts?
NPV wins, every time. That’s the rule.
Can both mutually exclusive projects and independant projects give you conflicting resluts?
For projects with unequal lives, EAA (equivalent annual annuity) is the best approach…all other cases, NPV wins over IRR
skillionaire Wrote: ------------------------------------------------------- > NPV wins, every time. > > That’s the rule. agreed but they may try to throqw a curve ball ur wy as in for a mutually exclusive project with unusual CF (i.e changes signs more than once) the IRR and NPV may give conflictn results
Yeah, the timing of a project will affect it’s IRR and NPV, but let’s keep it simple. Project 1 - NPV $10MM, IRR 5% (large capital outlay at start) Project 2 - NPV $1MM, IRR 50% (tiny capital outlay at start) You ALWAYS pick project 1, assuming equal lives.
“agreed but they may try to throqw a curve ball ur wy as in for a mutually exclusive project with unusual CF (i.e changes signs more than once) the IRR and NPV may give conflictn results” Understood, but that curveball is easily handled by remembering that NPV always wins.
skillionaire Wrote: ------------------------------------------------------- > Yeah, the timing of a project will affect it’s IRR > and NPV, but let’s keep it simple. > > Project 1 - NPV $10MM, IRR 5% (large capital > outlay at start) > Project 2 - NPV $1MM, IRR 50% (tiny capital outlay > at start) > > You ALWAYS pick project 1, assuming equal lives. agreed as of now all explanation must be parsimoneous as psossilble
If the CF changes signs more than once that gives you the problem of 2 possible IRR and you throw out the IRR, right?
Table 3 from reading 6 is confusing me.
In reading 6, NPV is said to be chosen over IRR if there is a conflict between two mutually exclusive projects. The example in table 3 is of cashflows at different times. But Project A, you’re done and dusted in 1 year and you can re-invest the initial + the profit into new ventures, whereas with Project D, you’re stuck for another 2 years. Surely in the real world, you would take project A and then look for additional investments elsewhere? Or is the underlying assumption that the investment universe is pretty much just these 2 projects?
Always use NPV for mutually exclusive projects. Remember to use EAA if they have unequal lives but then still use the NPV. Look out for things that say a project cannot be rolled over i.e. the 1 year project cannot be re-invested.
Also a really quick look at a project that is 1-yr vs a 5-yr for example. If the 1-yr has an NPV of 10 and the 5-yr an NPV of 20. A very crude measure is 10*5 = 50. Obviously this ignores discounting but could be a good starting point particularly if you feel strapped for time.
I see thanks.