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434 Corporate Finance BRILLIANT’S

4. Like NPV technique, the IRR technique is 4. ewÕ dV©_mZ _yë` Ho$ g_mZ hr, B§Q>Z©c aoQ> Am°\$
also based on the consideration of all the [aQ>Z© _oWS> _| g^r dfm] Ho$ H¡$e âcmoO H$mo gpå_{bV
cash flows occurring at any time. The
working capital used and released as well {H$`m OmVm h¡Ÿ& gmW hr d{Hª$J H¡${nQ>c VWm ñH«¡$n
as the scrap value is also considered. d¡ë`y Ho$ à^md H$mo ^r Ü`mZ _| aIm OmVm h¡Ÿ&
5. The IRR is based on cash flows rather than 5. My§{H$ aoQ> Am°\$ [aQ>Z©, H¡$e âcmo na AmYm[aV hmoVr h¡
accounting profits. Hence, it is more Bg{bE `h A{YH$ Cn`wŠV h¡Ÿ&
justified.
Drawbacks of IRR Method IRR _oWS> H$s> H${_`m±
Though the IRR technique possesses all the `Ú{n B§Q>Z©c aoQ> Am°\$ [aQ>Z© H$s _oWS> H$s ~hþV-
qualities of a sound evaluation technique, still gr {deofVmE± h¢ {H$ÝVw Bg_| Hw$N> H${_`m± ^r h¢, Omo Bg
it has some drawbacks which are as follows: àH$ma h¢…
1. Its calculation is based on trial and error 1. Bg {d[Y _| JUZm Q´>m`c Ed§ Eaa na AmYm[aV hmoZo go
method which is complicated and lengthy. `h Wmo‹S>r O{Q>b hmo OmVr h¡Ÿ&
2. The IRR technique is based on the assump- 2. B§Q>Z©c aoQ> Am°\$ [aQ>Z© _oWS> Bg _mÝ`Vm na AmYm[aV
tion that the future cash flows of a pro- h¡ {H$ ^{dî` _| àmßV hmoZo dmbo H¡$e âcmoO H$mo nwZ…
posal are reinvested at a rate equal to the BÝdoñQ> H$a {X`m OmEoJmŸ& àopŠQ>H$br ê$n _| Eogm hmoZm
IRR. Practically it is not essential that the Amdí`H$ Zht h¡Ÿ&
same firm will have different reinvestment
opportunities.
3. In evaluating mutually exclusive proposals, 3. EH$ go A{YH$ å`yÀ`wAbr EŠgŠby{gd ànmoOb H$s
the project with the highest IRR would be Xem _| {Og àñVmd H$s IRR A{YH$ hmoVr h¡ CgH$m
preferred. However, in practice, it may not M`Z {H$`m OmVm h¡Ÿ& {H$ÝVw `h Amdí`H$ Zht {H$
turn out to be the most profitable project. dh àñVmd g~go bm^Xm`H$ {gÕ hmoŸ&

NPV V/s IRR NPV ~Zm‘ IRR
Both the NPV method and IRR method are NPV _oWS> Ed§ IRR _oWS> XmoZm| hr H¡$e âcmo H$s
based on discounted cash flows techniques. The {S>ñH$mCpÝQ>¨J na AmYm[aV h¢Ÿ& BZ XmoZm| _| AmYma^yV AÝVa
basic difference between these two techniques
`h h¡ {H$ NPV _oWS> _| àmoOoŠQ> H$m _yë`m§H$Z {H$gr nyd©
is that in NPV method, the project is evaluated
for a pre-determined rate which is the cut off {ZYm©[aV Xa Ho$ AmYma na {H$`m OmVm h¡ Omo {H$ CgH$s
rate or minimum required rate of return. On {_{Z__ aoQ> Am°\$ [aQ>Z© hmoVr h¡Ÿ& Xygar Amoa, IRR dh Xa
the other hand, IRR is the rate of return which h¡ Ohm± H¡$e BZâcmoO H$m dV©_mZ _yë` AmCQ> âcmoO Ho$
equates the present value of cash inflows and
cash outflows. A comparison between the two ~am~a hmoVm h¡Ÿ& XmoZm| nÕ{V`m| _| VwbZm Bg àH$ma H$s Om
may be as follows: gH$Vr h¡:
Superiority of IRR over NPV IRR H$s NPV na loð>Vm
The IRR may be considered superior to the IRR H$mo {ZåZ H$maUm| go NPV loð> _mZm Om
NPV for the following reasons: gH$Vm h¡: