While I was evaluating two mutually exclusive projects using IRR, i found two discount rates. One of them was negative and it still brought positive NPV. How can you explain that? Is it totally absurd? Because in this case we are having cash surplus while there is negative return.
Dear Mushtahir:
Please recall the class lecture on different decision rules, including IRR. I talked about two situations when IRR is unreliable as a decision rule - when a project has non-conventional cash flows and when projects are mutually exclusive. For projects with non-conventional cash flows, number of possible IRRs can be as high as the number of sign changes in the cash flows. In some cases, there may be no IRR (meaning NPV is negative at every discount rate) at all (see example 9.5)! For mutually exclusive projects, IRR may be misleading as well.
The problem you are talking about may be explained in a more specific way if I have the numbers. In a nominal sense (disregarding time value of money, in other words, with a discount rate of '0') if cash outflows of a project are more than cash inflows, it may give you a negative IRR, for obvious reason - to turn negative NPV to zero. If you start reducing the discount rate even more (higher on absolute term) you will find higher positive NPVs!
Thank you for raising this point here. Hope this answers your query.
4 comments:
Dear Sir,when we will be able to check our final exam script? When you will be able to post the marks? I am from FIN254 CLASS.
Thanks in advance.
I ma from fin254 class.When I will be able to know my marks and can check my script?
Dear Mr. Imran,
Tomorrow is the last date of grade submission . will we get our FIN 254 result in tomorrow ?
Thanks in advance for your cooperation .
Aminshakil
Dear Mr. Imran,
Tomorrow is the last date of grade submission .Will we get our FIN 254 result at tomorrow ?
Thanks in advance for your cooperation
-Aminshakil
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