@Richa
We are trying to tie-up with some coaching institutes in India that help in CFA/FRM/Finance certifications. This will help the members to learn about these institutes and if the members are interested to enroll, then they will get some discounts. We are not promoting any of the institutes or their programs. However if someone is interested to enroll in some of the courses, then they can go to this page: http://www.daulatguru.com/discounts and download a form to save some money.
@Girish
Thanks for your support.
In case you have any particular finance professional/professor in mind whom we can interview, then please let us know. We will try our best to reach that person. People like Warren Buffet are hard to reach...
Well Sougata, you can try for some IIMs or XLRI professors. Infact, the interview of some economists (like Amartya Sen.. ) would be very excellent.
Girish Khajuriya
Hello,
I am a MBA student (Finance). I have certain queries related to the finance terms & topics... can anybody plz explain why using IRR to assess capital projects may be weak?
Sarita Khatod
Originally Posted by Sarita Khatod
Like the NPV method to capital budgeting, the IRR method also uses cash flows and recognizes the time value of money. Whilst being easy to compute and understand, the IRR method does have some drawbacks. The main problem with the IRR method is that it often gives unrealistic rates of return.
Assume we are assessing the financial attractiveness of an investment with a hurdle rate of 10% and the IRR is calculated to be 30%. An immediate assumption that financial analysts may infer from the IRR of 30% is that the investment is financially attractive and should be immediately accepted. However this is far from the reality, as an IRR of 30% assumes that there is an opportunity to reinvest future cash flows at 30%, rather than an actual return of 30%.
If proven, historical business performance and general economic conditions indicate that a 30% return is an exceeding high rate for future re-investments, there would be reason for a good financial analyst to suspect that an IRR of 30% is unrealistic. Simply speaking, an IRR of 30% can be considered too good to be true. Hence, unless the calculated IRR is a reasonable rate for reinvestment of future cash flows, it should not be used as a yardstick to accept or reject an investment.
A good financial analyst should also be aware that the IRR method may entail more problems than a financial modeler may anticipate. Another problem with the IRR method is that the IRR method may give rise to different rates of return. Assume a situation where there are 2 discount rates (i.e. 2 IRRs) that make the present value of an investment equal to the initial investment. In this case, a financial analyst would struggle to choose between the 2 rates as a decision factor for comparison with the cutoff rate.
However, in practice, the IRR method is considered more popular and straightforward than the NPV approach for financial management and decision making, especially for business executives without an advanced level of financial knowledge.
Generally speaking, to balance to trade offs between the NPV method and the IRR method, a good financial modeler would rely on both the NPV and the IRR when performing a capital budgeting assessment. If the IRR results of an assessment returns a very high value, a financial modeler must question whether such an impressive IRR is possible to maintain by looking at past and existing benchmarks, as well as future business opportunities, to see whether an opportunity to reinvest cash flows at such a high IRR really exists. If not, a good financial analyst would reevaluate the financial attractiveness of the investment by the NPV method, using a discount rate that is well researched and proven to be realistic and viable.
Please post Finance-related questions in the appropriate threads.
Dear DG members,
Hope you are doing well.
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Sougata
Dear Team DG,
Your forum is content rich but I sometimes find difficult to search. The search box in the forum and the "Advanced Search" Link below it are not very useful sometimes.
Please suggest how to easily search the content in the DG forum.
Nidhi
Thanks Nidhi for the feedback. We appreciate it.
There are two options to search this website. The one that you have tried is the search box in the forum (i.e. on the top right of this page). That search function works but may not be very user-friendly. So we have provided a better search function in the following page:
http://www.daulatguru.com/search
This search function is created in association with Yolink. You can search the required keyword and see previews of the result, share in Google Docs or in Social Media like Facebook and Twitter. We hope that this technology will help you to easily find the required content.
Thank you,
Team DG
It's cool!
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