Superiority of NPV over IRR

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Superiority of NPV over IRR
There is an easier understanding of currency form in net present value than the percentage form
in internal rate of return because NPV is measured in currency form while IRR is a percentage
form.
The internal rate of return cannot be an effective evaluator of due to its measurement using
percentages while the net present value uses currency amount. The net present value also
calculate any additional wealth. Both this methods are called discounted cash flows because they
all factor in the time value for money.1 This impacts greatly into projects with huge capital
investment valuation. Both IRR and NPV are future events series which is the negative cash
flows while income is the positive cash flows. 2
NPV returns cash flows net value. Receiving cash flow today is important than receiving a dollar
tomorrow. The fomular for NPV is
IRR
The internal rate of return is another NPV special case where the return rate is always equal to a
zero which is the the present value at net. 3
1 Kulakov, N. Y., & Kastro, A. N. B. (2017)
2 Santoso, N. B., Bahaweres, R. B., & Alaydrus, M. (2016, October)
3 Kulakov, N. Y., & Kastro, A. N. B. (2017)

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NPV( IRR( Values), values)= 04
In the case of a negative cash flow which occurs in earlier sequences than the positive cash
flows. IRR returns has a unique value5. The upfront initial investment is a negative cash flow
which will be followed by a positive cash flow sequence. They will have an IRR which is
unique.
While comparing projects, the NPV determines if a specific project earns more or less than the
hurdle rate or the desired rate of return. Both the IRR and the NPV will give numbers that are
used in comparison competing projects and make best choices for the business.
a) Project 1 relevant cash flow used in appraising the project.
Sales – projected car production for the next 5 years
Year 1 Year 2 Year 3 Year 4 Year 5
No. of cars @4% @4% @4% @4% @4%
50,000 52,000 54,080 56,244 58,493 60,833
4 Magni, C. A., & Martin, J. D. (2017).
5 Magni, C. A., & Martin, J. D. (2017). The Reinvestment Rate Assumption Fallacy for IRR and
NPV. Available at SSRN 3090678.

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Project 1
Initial capital( Io) =$ 20,000,000
Useful life = 5 years
Residual value= 0.
Internal failure costs
Internal failure cost($) Percentage (%) probability total
300,000 50% 150,000
500,000 50% 250,000
700,000 50% 350,000
External failure costs
External failure cost($) Percentage (%) probability total
1,300,000 60% 780,000
1,900,000 30% 570,000