This question basically asks you to compare the Net Present Value (NPV) to the Internal Rate of...

Question

This question basically asks you to compare the Net Present Value (NPV) to the Internal Rate of return (IRR) on the time length of an investment project..a. Draw a “growth curve” for a investment project on a log P V t space and interpret itÃ­s meaning. b. On your graph show the optimal investment time under the NPV criterionc. Show the same for the IRR criteriond. In general when do you prefer IRR over NPV ?

Robert · Accepted Answer

NET PRESENT VALUE TO IRR ON THE TIME LENGTH OF AN INVESTMENT PROJECT
   Net Present Value technique is a discounted cash flow method that consider the time value of money in evaluating capital investments.
NPV is Calculated using formula = Present value of net cash inflow – total net initial investment
IRR is the discounted rate that equates the present value of the expected cash inflows with the initial cash outflow.
For Better understanding let us understand it with an illustration
For example, a 30000 cash outlay for a project with annual cash inflows of 6000 having life of 10 years and discounted rate is 15%. 
	YEAR
	CASH FLOW
	PVF @ 15%
	PV
	CUMMULATIVE PV
	1
	6000
	0.870
	5220
	5220
	2
	6000
	0.756
	4536
	9756
	3
	6000
	0.658
	3948
	13704
	4
	6000
	0.572
	3432
	17136
	5
	6000
	0.497
	2982
	20118
	6
	6000
	0.432
	2592
	22710
	7
	6000
	0.376
	2256
	24966
	8
	6000
	0.327
	1962
	26928
	9
	6000
	0.284
	1704
	28632
	10
	6000
	0.247
	1482
	30114
A) GROWTH CURVE FOR AN INVESTMENT PROJECT 
                    
 Here X axis shows T time period of the project and Y axis shows PV that is cumulative present value of the project.

This question basically asks you to compare the Net Present Value (NPV) to the Internal Rate of return (IRR) on the time length of an investment project..a. Draw a “growth curve” for a investment...

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