净现值法和内部报酬率法的比较

Net present value (NPV) and Internal Rate of return (RRR) are two of the most commonly used methods of capital budgeting to analyse projects and determine project and investment viability. Both methods measure the expected total return on an investment and are fundamental to any organization or business in evaluating if the investment will or will not generate returns and be beneficial to their overall financial returns. Although both methods are well-known, they are routinely misapplied or confused with each other, as they bring to light different features of an analysis. This essay will compare and contrast the procedures and results derived from using net present values (NPV) and internal rate of return (IRR), by examining their definitions and the data used, whilst highlighting the risks and issues which arise from using each approach.



Net present value is a measure of profitability for a project and calculates the present value of both the cash inflows and outflows of the business over an extended period of time. NPV uses a discount rate which is generally the market interest rate, or the cost of capital, to compare returns from the investment against this amount. NPV gives a definite value to a particular project, which is calculated by subtracting the current cost of the project from the value of future cash inflows, in today's terms (Hansen & Mowen, 2012). It is the most widely used method of capital budgeting by companies and is advantageous in that if the present value is positive, then the project/investment is viable, is beneficial and should be accepted.

Internal rate of return (IRR) is a potential measure of profitability which determines the rate of return that is required before the present value of the future cash flow is greater than the value of the initial cost (Hansen & Mowen, 2012). IRR compares all cash flow which comes from the project, takes into account any initial costs, tax, the time value of money and inflows and outflows over the lifetime of the investment. IRR is used to calculate each projects expected rate of return, rather than the overall return of the investment once all other cash returns have been adjusted and the NPV has been calculated. If a projects IRR is higher than that of the cost of capital, then the project can be expected to have a positive and beneficial return (Coulson, 2013).

Although both NPV and IRR methods can use the same data when evaluating investments decision, the actual calculation methods and the results are quite different. NPV would be calculated by subtracting the present value of the cash outflows from the present value of the cash inflows. Whereas with IRR the initial outlay is repeatedly discounted until the sum of the present values amounts to zero or greater than the initial outlay. The result of the NPV calculation may be positive or negative, with a positive figure indicating a viable investment while a negative NPV equates to a non-viable option. On the other hand, IRR results may be used to compare different investment options to determine which would be most profitable, and considerations such as the size of the project and any associated risks, may be taken into account. IRR results are expressed in the scale of cost of capital, the expected rate of profit and the time value of money.

A comparison of the advantages of both methods shows that the NPV method is an economical way to analyse projects, and any changes made to the time value of money or the cash flow of the project can easily be assessed, whereas the IRR method's calculation become more complicated when the changes are made. NPV can also compare a single projects profitability with that of other investments and integrates the risk of the cash flow nicely into the equation, while IRR often gives a false impression when the cash flow streams vary during the investment.

However, NPV also has a major disadvantage; it relies on a rate of return or the cost of capital being known, which makes it difficult to use when the required rate of return is unknown (Holden & Robinson, 2014). The cost of capital assumed for a business can have an impact on the values of future cash flows and the risk associated with these inflows (Hansen & Mowen, 2012). IRR does not require a precise rate of return and ignores the size of the investment in its calculation, which can be beneficial if the required rate of return is unknown or unknown (Holden & Robinson, 2014).

In conclusion, both the NPV and IRR methods are two of the most commonly used methods of capital budgeting to analyse projects to analyse investment performance. Both methods provide valuable information which can be used to make sound financial decisions and take in to account any cash flows overtime and any associated risks.However, they should not be used independently of each other, as they are complementary methods which each provide different aspects of the investment. NPV is based on the value of future cash flows where as IRR is based on the rate of return from the project. Together, NPV and IRR measure the expected total return on an investment and should be used together to provide a well-rounded conclusion on the investment.

References

Coulson, N. (2013). Capital Budgeting: Financial Appraisal of Investment Projects (8th ed). Harlow: Pearson Education.

Hansen, D., R., & Mowen, M., M. (2012). Managerial Accounting (7th ed). Mason: South-Western Cengage Learning.

Holden, C., W. & Robinson, B., J. (2014). The Practice of Management Accounting:A Framework for Managerial Decision Making (3rd ed). Chatswood: Cengage Learning.