For independent project, which should be used? IRR and NPViYes or noj PI and IRR(yes or no) thanks again in advance!
First time posting here, so if I’m wrong, please correct me. IRR and NPV would be a definite yes, but NPV will be the major decision to take on the project or not. PI and IRR would be a yes? since PI also uses the NPV of the project to get the ranking value for each project. What I’m confuse is the literal difference between NPV and PI. Is it just the difference between ordinal and norminal scale?
the question seems a bit incomplete, but I would say for independent projects you would use IRR and NPV.
For “Conventional” projects (i.e. outflows first, followed by inflows), any discounted cash-flow based measure will give identical accept/reject decisions. TO see why, examine an NPV profile - the typical profile has a positive NPV at a zero discount rate, and the NPV declines monotonically as the discount rate increases. So, NPV>0 <==> PI > 1 <==> IRR > Cost of Capital (the same holds for NPV < 0) The key is that projects are independent. THerefore, the decision comes down to whether a given project is “good”. IF ANY one of the three (NPV, IRR, PI) says to accept it, they all will. The problem comes when they projects aren’t independent --they’re mutually exclusive, or you have capital rationing (in other words, you don’t have enough funds to accept all “good” projects). In these cases, you rank the projects by NPV and accept the project or projects that fit your constraint (i.e. the one with the higher NPV (assuming it’s positive) if they’re mutually exclusive, or the cohort of projects that give you the highest total NPV without exceeding your capital constraint in the case of capital rationing)
I use my industrial financial tape measure. If it is raining though, I have to use the laser sight. They usually tell me this below: Independent IRR and NPViYes or no BOTH PI and IRR(yes or no) BOTH Mutually Exclusive IRR and NPViYes or no NPV PI and IRR(yes or no) PI
I’m only familiar with IRR and NPV… what is PI?