shouldn’t be the project accepted based on only NPV even if the IRR is positive its good but isnt NPV the ultimate accept/reject criteria to undergo a project??
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Here IRR is greater than cost of capital i think that is the reason it is based on both. Since when IRR is higher than Cost of capital it shows higher cashflows pf the company
Irr cannot be less than cost of capital when npv is positive
Generally NPV is the criteria on which we decide but at the same time IRR shall be greater than cost of capital as it tells that the co., is expected atleast a rate of return which would cover it’s cost.
Hope this helps!
Obviously when npv is positive then irr will be greater than cost of capital. When there are multiple projects with different cash outlays and if these projects are mutually exclusive then irr is a better tool. Even for single project npv only tells us about the amount of excess return we are getting but irr shows it in percentage terms so both are useful
Shouldn’t we check for npv when projects are mutually exclusive??
We have to. If one of the project is having negative npv and other is having positive npv then we dont need to calculate irr wewill just select the project with positive npv. But if both the projects have positive npv then we have to calculate irr to calculate the return in percentage terms
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