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TrueIRR IRR and NPV redefined

2. Chapter 1 Introduction . Limitations of IRR and NPVIllustration on Multiple IRRsReasons for multiple IRRs. 3. 1.Limitations of IRR and NPV . Internal Rate of Return(IRR) is a commonly used capital budgeting technique. It is also used in many other areas. Several deficiencies in I

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TrueIRR IRR and NPV redefined

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    1. 1 TrueIRR IRR and NPV redefined Chapters Introduction Cumulative Future value Classification of series Combination series and IRR TrueIRR Technique Margin Value concept Application of TrueIRR Reinvestment assumptions in IRR and MIRR TrueNPV

    2. 2 Chapter 1 Introduction Limitations of IRR and NPV Illustration on Multiple IRRs Reasons for multiple IRRs

    3. 3 1.Limitations of IRR and NPV Internal Rate of Return(IRR) is a commonly used capital budgeting technique. It is also used in many other areas. Several deficiencies in IRR technique. existence of multiple IRRs Reinvestment Assumption etc. Financial theorists suggest NPV and MIRR techniques to overcome the limitations of IRR. However these techniques are also not free from limitations. Multiple IRRs: Some cash flow series have multiple IRRs. In such cases, the decision maker will be in dilemma as to which IRR has to be considered for decision-making. Further, in the case of such series, as we increase the discount rate, NPV oscillates from positive to negative and negative to positive. Therefore, the decision maker cannot rely upon the NPV either.

    4. 4 2. Illustration of Multiple IRRs Illustration 1: A Bank is offering a Recurring Deposit (R.D.) linked Loan scheme. Under the scheme, the Bank will give a loan of $15000. The loan will have to be repaid along with the installments of R.D. scheme. The installments are given below. At the end of 6th year, the Bank will be repaying you $35061 being the maturity amount of R.D. scheme. IRR of the Scheme is 4.06% and 27.2%. Interestingly, the proposal has two IRRs. The customer doesnt know which IRR has to be considered for decision-making. Further, as we increase the Discount Rate, NPV is fluctuating from positive to negative and negative to positive. Therefore, customer cannot rely upon NPV either.

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