Question

Explain the following briefly with your own words. (max 200 words for each.)

Assume as if you are explaning the matter to one of your colleagues who did not take acc. & finance course.

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• 4) What are NPV and IRR methods?

Answer 1

NPV or net present value is a valuation metric used for assessing the value of an investment. It is equal to the sum of discounted values of future positive cash flows for an investment less the initial investment. The cash flows are discounted at the firm's cost of capital or WACC( weighted average cost of capital). An investment is accepted when NPV or Net present value>0.

IRR or Internal rate of return is the rate at which the firms cash flows are invested to get the NPV. In other words, it is the rate at which the Net present value is equal to zero (0) . An investment having IRR > Cost of capital is accepted while it is rejected when it is less than the cost of capital.