投資項目效益評價.ppt75

Advanced Topics in Capital Budgeting
II. Conflicts between NPV and IRR for Mutually Exclusive Projects
1. Size Effect of Investment Outlay on NPV and IRR
(1) Conflict——Which Maximizes Shareholder’s Wealth?
Suppose that there are two projects, A and B, n=1, K=10%, their investment outlays and NCF are presented in the following table.
Project I0 NCF1 NPV (k=10%) IRR PVI
A 5,000 8,000 2,273 60% 45.46%
B 50,000 75,000 18,182 50% 36.36%
Both projects are acceptable due to their positive values of NPV, however, given that the two projects are mutually exclusive, which one is preferred?
Also, because the size of investment outlays for A and B are different. By NPV, A is better than B; by IRR (or PVI) B is over A. This case is typical as a conflict raised from decision criteria by NPV or by IRR?
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(2) Solution
Since K=10% is assumed to be fixed, we can solve this conflict by creating a differential project (B-A), if the differential project yields a positive NPV, it is obvious that B is better than A because not only a part of B will create a NPV equal to NPVA, but also create a positive NPV for the differential project (B-A). Thus, we create a differential project (B-A), and then calculate its NPV and IRR
NPV(B-A) = [(75000-8000)/(1+10%)]-(50000-5000)=$15909
[(75000-8000)/(1+IRR(B-A) )]=(50000-5000), IRR(B-A) =48.8%
No doubt, the results above suggests that the investors of the firm will be better off if project B is accepted.

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