Page 123 - APM Integrated Workbook STUDENT S18-J19

Financial performance measures in the private sector
Profitability measures –
key projects
NPV (net present value):
the present value of all
cash inflows – the present
value of all cash outflows.
IRR (internal rate of
return):
The discount factor (DF)
when NPV = 0.
Accept project if IRR
> cost of capital.
NL
IRR = L + × (H – L)
NL – NH
L = L = Lower rate of
interest
H = Higher rate of interest
NL = NPV at the lower rate
of interest
NH = NPV at higher rate of
interest
MIRR (modified internal
rate of return):
The actual % generated by
the project.
Accept project if MIRR
> cost of capital.
Advantages Disadvantages
 Measure aligned to  Absolute figure so hard
shareholder wealth. to compare projects.
 Easy decision rule;  Based on a number of
accept projects with a assumptions.
positive NPV.
 Cash flows less subject
to manipulation than
profits.
 Considers whole life of
project.
Superior to NPV in some Overall, less superior to
ways: NPV since:
 percentage aids  possible to get more
comparison than one IRR
 useful when cost of  trickier to calculate and
capital uncertain. understand.
 As for IRR.  Overall, less superior to
NPV, e.g. trickier to
 In addition, eliminates
the problem of more calculate and
than one IRR being understand.
possible.
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