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Essay / Research Paper Abstract
This 3 page paper compares and contrasts the use of net present value (NPV) with internal rate of return (IRR) as an assessment tool to help with assessing potential investments or projects. Both of the tools are explained and then compared in order to determine which is superior. The bibliography cites 3 sources.
Page Count:
3 pages (~225 words per page)
File: TS14_TEcompNPVIRR.rtf
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Unformatted sample text from the term paper:
return (IRR) are both advocated as useful tools that can be used to assess and compare projects or investments, even where they potential investments have different terms and risk profiles,
however, there does not appear to be a universal agreement on which is best. A net present value calculation is based on the projections of future net revenues, with
any future net revenues taking place in more than 12 months discounted to allow for the time value of money (Lester, 2004). The net present value of a calculation takes
all of the discounted net revenues for future years as them together, and subtracts the initial investment amount to give a value in todays money. This is not a new
concept, when looking at past projects, as well as financial statistics, it is not unusual to equalize the monetary value to a specific year. However, in use of the NPV
calculation there are a number of influencing factors, not only the determination of the discount factor, which is usually calculated is the weighted average cost of capital for the organization,
but also potential variations in the potential returns that are created. However, the final measure which is a monetary measure is one that can be used compared to other potential
investments. The internal rate of return takes a similar approach, in seeking to create a singular measure by which different projects can be compared. Internal rate of return uses NPV
calculations in order to assess the percentage rate of return that a single investment will provide over the life of the project. Similar processes have to take place with the
discounted cash flows. However, it is argued that many management teams that specialist accounting knowledge find the concept of the internal rate of return easier, as they are comparing a
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