Page 111 - Microsoft Word - 00 P1 IW Prelims.docx

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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