I have a midterm tomorrow and you cleared a misconception I had, now I'm more confident than ever, thanks! It never occurred to me that you can get a new cashflow by comparing two cashflow, and that new cashflow had its own IRR called Incremental IRR.
Professor - At one point you mention (as a Caveat) that you cannot say whether the two projects on a stand-alone basis are positive NPV. But that's not true, is it! Both the projects ARE positive NPV because their IRRs are greater than the given discount rate of 10%. Could you clarify what you mean by that caveat?
You told us that IIRR of this example is 29%. that is IIRR calculated to chose project 1 over project 2. What if we calculate it the other way around? as in find the IIRR to see of project 2 is profitable more than project 1. in which case there would be two different values of IIRR. Am I right? one IIRR would be high than the other one right? so, in this case, which project should I accept? Please answer my question. Thank you!!
Great vid. I have one question though... my prof seems to really insist on having initial investments compared over NPV at most times. Would you consider initial investment as a make it or break it for a project? Thanks
So if Project 2 has an Incremental IRR over Project 1 greater than the cost of capital(same for both projects), will it always have a positive NPV as long as IRR for Project 1 is also greater than cost of capital?
IRR is the value (rate) such that NPV = 0, so you can only get it thanks to trial and error. So he just used the excel formula that does the trial and error for us, and then he rounded up the numbers for simplicity purposes