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Rough Book

This document contains information about cash flows and calculations for net present value (NPV) and internal rate of return (IRR) on a potential investment project. It lists cash flows over multiple years, calculates the NPV using a formula method, and determines that the NPV is positive so the project should be accepted. It also shows cash flows, calculates the IRR as 16% and states that if the IRR is greater than the opportunity cost of capital, the project should be accepted. It provides an explanation of how IRR assumes regular cash flows while XIRR can handle irregular cash flows.

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381 views5 pages

Rough Book

This document contains information about cash flows and calculations for net present value (NPV) and internal rate of return (IRR) on a potential investment project. It lists cash flows over multiple years, calculates the NPV using a formula method, and determines that the NPV is positive so the project should be accepted. It also shows cash flows, calculates the IRR as 16% and states that if the IRR is greater than the opportunity cost of capital, the project should be accepted. It provides an explanation of how IRR assumes regular cash flows while XIRR can handle irregular cash flows.

Uploaded by

sharadkulloli
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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FV

Years
Interest rate
-10000
2750
4250
3250
2750

1/1/2008
1/3/2008
10/30/2008
2/1/2009
4/1/2009

C0
C1
C2
C3
C4
C5

3000
40.3681%

900
1
10%

NPV by formula method

-2500
900
800
700
600
500
Sum
225.53

-2,500.00
818.18
661.16
525.92
409.81
310.46
225.53
POSITIVE VALUE

Accept the project

Year

Cashflow

0
1

-16000
8000

2
3

7000
6000

IRR

16%

If 16% > k (opportunity cost of capital/required rate of return/cutoff rate/hurdle rate)

IRR is periodic cash flows (annually monthly, etc)


XIRR is irregular cash flows. XIRR makes more sense to use this because cash/earnings are received throughout
the year and not at the end of the year.

An easier way to explain this is that XIRR accounts for the cash flows when they are received, rather than IRR
which values the cash flows at the end of the month. Given the essence of TVM and the concept that present cash
flows are worth more than those in the future, XIRR is a more accurate way to calculate the return of cash flows as
they occur in real time.

IRR assumes that all specified cash flows are made at regular intervals, and thus expresses the calculated IRR
value as a percentage value for that specific interval. You stated that you were specifying monthly cashflows,
therefore Excel calculates a monthly IRR (that must be multiplied by 12 to get an annualized IRR). If your
cashflows had been yearly cashflows, the calculated IRR will be an annual IRR.
XIRR allows cash flows to happen at any time, at irregular intervals, and thus the timing of the cash flows is
considered in the calculated result, and no adjustment (i.e., multiplying by 12) is required. The calculated XIRR is
valid for the entire timeframe.

accept the project

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