Dear team,
I have a question in the first part of this course as I marked as yellow in the attached file
Actually I have no problem with the formula but I have a question about the comparison between 2 NPV and IRR
As I know, projects with higher NPV and IRR might be more profitable and in sheet "compare", it also said the higher NPV should be chosen. However, in the sheet "compare NPV" and "compare IRR", it shows that project A has higher NPV than project B but project B has higher IRR than project A and in the video, the decision is project B. So, in this case, which criterion will be prioritized to make this decision?
My warmest regards
Alfie
Alfie
Thank you for your question.
This is an Excel for Finance module/class and we focused of how to use Excel to calculate, among other functions, the NPV and IRR.
If you are an investor or a decision maker - ALWAYS accept the project with higher NPV. It is because IRR characteristically assumes that any cash flows can be reinvested at the same IRR (Internal Rate of Return.) This belief is challenging, because there is no assurance that equally profitable opportunities will be available as soon as cash flows occur with that rate. We call it Reinvestment Risk – not having enough opportunities to invest at the same rate.
Others may argue that NPV has also the risk of not having new opportunities with the same cost of capital.
Consulting with colleagues and investors – they all said, “always accept the project with higher NPV”.
Isaac
