What is NPV in finance?
Net Present Value ( NPV ): Net Present Value is the difference between the sum of the present values of the future cash flows of the project and the initial cost of the project. Companies use weighted average cost of capital as the discount rate to calculate the NPV.
What is NPV in accounting?
NPV is a function of required rate of return and cash flows. If the required rate of return is increased the NPV will be reduced. Even the NPV goes to negative if the required rate of return is more. PI also moves in the same direction as the NPV.
Is NPV better than IRR?
Under the NPV the reinvestment rate is same as the required rate of return. Under the IRR the reinvestment rate is the Internal Rate of Return (IRR). NPV is better than IRR, since the required rate of return is nothing but the cost of capital, where as the IRR is not equal to cost of capital. It may be greater than the cost of capital or less than the cost of capital.
Does a change in required rate of return affect the IRR?
A change in required rate of return will affect the decision, but it will not affect the IRR. IRR will be the same whether the required rate of return is 15% or 20% or 25%. But a change in required rate of return affects the decision.
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