The Scenario Analysis for NPV and IRR in Mutually Exclusive Projects

Abstract

In the real world, the project of business decision is relatively long and requires more capital investment, which leads to higher requirements for the feasibility of project investment and scientific decision-making. To improve the science of business decision-making, the application of a series of evaluation indicators and analysis methods to quantitatively analyze the feasibility of the project is a reliable measure. Among countless evaluation indexes, the dynamic indexes are usually more superior when it refers to help make comparisons and decisions between different business projects. The net present value (NPV) and internal rate of return (IRR) are the most used indexes due to their reliability, scientific and representativeness. Normally, the application of both indexes in evaluating the feasibility of an independent project leads to the same conclusion. However, in mutually exclusive projects, the use of these two indexes may result in contradictory results, this thesis aims to analyze the cause of this contradiction from the angle of theory and practice. Compare the advantages, disadvantages, and differences of both indexes. By giving the example of two mutually exclusive projects, analyze how NPV and IRR change under different discount rates, find out the connection among them. In the end, discuss the application of these indexes and ponder the defect of this finding, investigate the future development.

Economic Efficiency of Investments in the Growing of Medicinal Herbs and Spices

“…13-29), Belgrade range of discount rates (higher than the crossover rate), NPV and IRR could lead to the same conclusion, while for another range of discount rates (lower than the crossover rate), NPV and IRR could give contradictory results and conclusions (Ivanović, 2013). The crossover rate could be determined as the IRR of diferential net cash flow of the observed investments (Ivanović, Marković, 2018;Ren, 2022). By applynig this approach, it is determined that the crossover rate is 6.08%.…”