Investment

Paper Summary:

This paper compares IRR and NPV investment tools. The author offers examples of the workings of both these tools. It concludes that due to findings, explained in the paper, that NPV is the better investment tool.

From the Paper:

"Though IRR is more widely used than the NPV method , NPV yields much better returns as argued by the majority of the finance gurus due to the numerous pitfalls of IRR. They include inability to estimate exact IRR if the cash flows change their signs more than once, thus, there is more than one negative cash outflow, and IRR formula derives wrong results, for example, multiple IRRs or none IRR result at all. Another fault is inability to derive direct IRR if we are lending or borrowing, because for borrowing project the first cash flow will be positive with the rest of the cash flows, or debt payments, being negative and this fact must be considered when estimating IRR."

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