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Investment decison

Is there any particular method to select best project if different methods like NPV, IRR, Desirability factor give conflicting results


shamanth rm

shamanth rm

CA Inter

120

11-Apr-20 22:56

25

Answers (2)

This has been specifically explained in the FM classes. please go through them


Sriram Somayajula

Sriram Somayajula

Admin

12-Apr-20 09:21

Hi Shamath, Please refer to page 7.49 & 7.50 of ICAI Material link ( https://resource.cdn.icai.org/56019bosinter45376-p8-seca-cp7.pdf) to know how to evaluate between NPV & PI. For the conflict between NPV & IRR - You will get differing results for two or more projects only and only if there are disparities in project life / project size / project cash flows; In such circumstances which project is chosen depends on the circumstances of the case. Eg if there is a project with 15% IRR but NPV is very small and another project with 14% IRR but very high NPV for same level of investment and project life, but due to differing nature of cashflows then you may chose the project with higher NPV as long as its IRR is also > Ke. Same way If there is a project which gives high NPV and high IRR but is only a 1 year project compared to another project which is 5 year project and has slightly lower NPV & IRR, & the investment horizon for the company is 5 years, then you will choose the 2nd project. You will have to understand specific circumstances in each case to answer this question


Sriram Somayajula

Sriram Somayajula

Admin

13-Apr-20 18:33