Page 435 - Corporate Finance PDF Final new link

NPP

BRILLIANT’S Capital Budgeting 435

(i) IRR gives the result in percentage return (i) IRR à{VeV [aQ>Z© _| n[aUm_ XoVm h¡ O~{H$ NPV
while the NPV gives absolute return. Hw$c [aQ>Z© Xem©Vm h¡Ÿ&
(ii) For IRR, the availability of a required rate (ii) IRR _| aoQ> H$m AmYma hmoZm Amdí`H$ Zht h¡ O~{H$
of return is not essential while for NPV it NPV _| Amdí`H$ h¡Ÿ&
is must.
Superiority of NPV over IRR IRR na NPV H$s loð>Vm
The NPV method is said to have NPV _oWS> H$mo {ZåZ H$maUm| go IRR go loð> _mZm
superiority over IRR due to following points: OmVm h¡:

(i) The acceptance–rejection decision rules of (i) {H$gr àmoOoŠQ> H$mo ñdrH¥$V `m AñdrH¥$V H$aZo g§~§Yr
NPV are clear while the IRR may give {Z`_ NPV _| ñnï> h¢ O~{H$ IRR go {^Þ-{^Þ
multiple results. n[aUm_ Am gH$Vo h¢Ÿ&
(ii) NPV shows accepted increase in the (ii) NPV eo`a hmoëS>g© H$s doëW _| d¥{Õ H$m CÔoí`
wealth of the shareholders. Xem©Vr h¡Ÿ&
(iii) Practically, the NPV gives better ranking (iii) ì`dhm[aH$Vm _| NPV H$s ghm`Vm go àmoOoŠQ> H$s
as compared to the IRR. a¢qH$J, IRR go ~ohVa hmoVr h¡Ÿ&

Advantages of Discounted Cash {S>ñH$mCÝQ>oS> Ho$e âbmo Q>opŠZŠg Ho$ bm^
Flow Techniques
On the basis of above discussion, it is clear Cnamoº$ {S>ñH$eZ go ñnï> h¡ {H$ {S>ñH$mCÝQ>oS> Ho$e
that the discounted cash flow technique like âbmo Q>opŠZH$ O¡go {H$ NPV VWm IRR AÝ` Q>opŠZŠg O¡go
NPV and IRR have considerable advantage
over the other techniques like payback period no-~¡H$ {n[a`S> VWm AH$mCpÝQ>¨J aoQ> Am°\$ [aQ>Z© go loð>
and the accounting rate of return. The hmoVr h¢Ÿ& Q´>o{S>eZb Q>opŠZH$ H$s VwbZm _| {S>ñH$mCÝQ>oS> Ho$e
advantages of discounted cash flow techniques âbmoO Q>opŠZH$ Ho$ {ZåZ{b{IV bm^ h¢:
over the traditional techniques are as follows:
1. These consider the time value of money 1. `o _Zr H$s Q>mB_ d¡ë`y H$mo Ü`mZ _| aIVr h¢ Omo {H$
which is very important in considering H¡${nQ>b ~OqQ>J g§~§Yr àñVmdm| Ho$ _yë`m§H$Z Ho$ {b`o
capital budgeting proposals. AË`§V _hËdnyU© h¡Ÿ&
2. In most of the cases, the DCF techniques 2. A{YH$m§e Ho$gog _|, DCF Q>opŠZŠg ñnîQ> {S>{gOZ ê$b
give a clear cut decision rule. XoVr h¢Ÿ&
3. All the cash flows are considered in DCF 3. DCF Q>opŠZŠg _| d{Hª$J H¡${nQ>b Ed§ gm°ëdoO d¡ë`y
techniques including working capital and Ho$ gmW-gmW g^r H¡$e âbmoO em{_b {H$E OmVo h¢Ÿ&
salvage value.
4. The risk associated with future uncertain- 4. ^{dî` H$s A{ZpíMVVmAm| go Ow‹S>r [añH$ H$mo [aQ>Z©
ties can be easily minimised in the DCF H$s Amdí`H$ aoQ> H$mo ES>OñQ> H$aHo$ DCF Q>opŠZŠg
technique by adjusting the required rate _| gabVm go H$_ H$s Om gH$Vr h¡Ÿ&
of return.
