by Naiyer Jawaid | Mar 29, 2016 | Excel, Finance | 46 comments
Deepak on April 3, 2016 at 5:44 am
Good learning
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Deepak on April 3, 2016 at 5:44 am
Good learning
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Brian on July 7, 2016 at 12:48 am
this stuff is way too complicated! i’m in marketing—i’ll let finance geeks figure it out.
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Brian on July 7, 2016 at 12:48 am
this stuff is way too complicated! i’m in marketing—i’ll let finance geeks figure it out.
Reply
Vikrant Uppar on November 26, 2016 at 8:19 pm
Can there be more than 2 IRRs if there are multiple sign changes in the cash flows?
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Vikrant Uppar on November 26, 2016 at 8:19 pm
Can there be more than 2 IRRs if there are multiple sign changes in the cash flows?
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Kate on August 4, 2017 at 2:49 pm
Hello! Could you explain what an IRR of 0% means when the NPV is slightly positive?
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Karn on February 15, 2018 at 4:17 am
An IRR of 0 means that NPV=0. It basically means than your future cash flows at present value are enough to cover your initial investment and not provide any additional return, i.e., profits on the project
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Olami on August 4, 2019 at 7:47 am
Well understood. But I came across someone who gave me a formula for calculating IRR when the NPV is always negative and the IRR will still be positive. How real is this? Can you throw more light on it?
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Kate on August 4, 2017 at 2:49 pm
Hello! Could you explain what an IRR of 0% means when the NPV is slightly positive?
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Karn on February 15, 2018 at 4:17 am
An IRR of 0 means that NPV=0. It basically means than your future cash flows at present value are enough to cover your initial investment and not provide any additional return, i.e., profits on the project
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Olami on August 4, 2019 at 7:47 am
Well understood. But I came across someone who gave me a formula for calculating IRR when the NPV is always negative and the IRR will still be positive. How real is this? Can you throw more light on it?
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Pablo on August 30, 2017 at 3:22 pm
What is the IRR if the cashflow only has a negative value at the end of the period??
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Daniel on March 23, 2018 at 2:24 pm
In your second example, you’ve invested 3,200, but have only received 3,100 in distributions; this indicates that the return should be negative and not positive, don’t you agree? I think there should be a negative…
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Dr Kannan on October 20, 2019 at 7:04 am
A smart question Dan! Two IRRS 6.6% AND 36.5% (This is the case discussed in A. Damodaran). I have published a paper in Australian Economic Papers in details about such issues and this specific case of IRR 6.6% and 35.5%. Please note the ACTUAL IRR IS -9%. The undiscounted NCF = -100 and that being the net loss of 10%. By discounting it works out to -9%.
Link to those papers are below:
https://onlinelibrary.wiley.com/doi/full/10.1111/1759-3441.12239
Non?monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A New Method that Resolves these Problems? Kannapiran C. Arjunan Economic Papers, Volume38, Issue1 March 2019
Pages 56-69Arjunan, Kannapiran, Non-monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A Critical Analysis to Resolve These Problems (August 3, 2018). Forthcoming in the Australian Economic Papers Journal. Available at SSRN: https://ssrn.com/abstract=3225559 or http://dx.doi.org/10.2139/ssrn.3225559
Published in the Australian Economic Papers JournalReply
Daniel on March 23, 2018 at 2:24 pm
In your second example, you’ve invested 3,200, but have only received 3,100 in distributions; this indicates that the return should be negative and not positive, don’t you agree? I think there should be a negative…
Reply
Dr Kannan on October 20, 2019 at 7:04 am
A smart question Dan! Two IRRS 6.6% AND 36.5% (This is the case discussed in A. Damodaran). I have published a paper in Australian Economic Papers in details about such issues and this specific case of IRR 6.6% and 35.5%. Please note the ACTUAL IRR IS -9%. The undiscounted NCF = -100 and that being the net loss of 10%. By discounting it works out to -9%.
Link to those papers are below:
https://onlinelibrary.wiley.com/doi/full/10.1111/1759-3441.12239
Non?monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A New Method that Resolves these Problems? Kannapiran C. Arjunan Economic Papers, Volume38, Issue1 March 2019
Pages 56-69Arjunan, Kannapiran, Non-monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A Critical Analysis to Resolve These Problems (August 3, 2018). Forthcoming in the Australian Economic Papers Journal. Available at SSRN: https://ssrn.com/abstract=3225559 or http://dx.doi.org/10.2139/ssrn.3225559
Published in the Australian Economic Papers JournalReply
Anupkumar Shetty on June 9, 2018 at 6:33 am
If the Net-Present-Value of an investment is less than zero, the investment is:
1. Attractive on its financial merits.
2. Not attractive on its financial merits.
3. Only attractive if the IRR is also less than zero.
4. Not determinable from the information provided.
Which is the correct answer? (I don’t know the answer)
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Naiyer Jawaid on July 22, 2018 at 9:04 am
Not attractive on its financial merits.
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Dr Kannan on October 20, 2019 at 6:36 am
Without knowing the discount rate and your desired rate of return (or WACC) its not sensible to reply to your query. When the NPV at your required rate of discount or return (or wacc) is zero the investment is in breakeven i.e just recover the cost with a return equivalent to your desired rate. If negative then reject the investment, If positive Accept the investment. But try to use IRR also.
Dr Kannan?Arjunan, PhD (Economics), MBA (Finance), CAIIB, B.Sc. Agri.
Brisbane, Australia?
View my research on my SSRN Author page:
https://ssrn.com/author=2637148https://rdcu.be/bidzh – Non-monotonic NPV Function Leads toSpurious NPVs and Multiple IRRReply
Harshad Dixit on February 21, 2020 at 5:18 am
Thank you for sharing Dr. Kanna, I was scratching my head over a DCF analysis with multiple IRRs and stumbled upon your paper.
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Anupkumar Shetty on June 9, 2018 at 6:33 am
If the Net-Present-Value of an investment is less than zero, the investment is:
1. Attractive on its financial merits.
2. Not attractive on its financial merits.
3. Only attractive if the IRR is also less than zero.
4. Not determinable from the information provided.
Which is the correct answer? (I don’t know the answer)
Reply
- See AlsoLM04 Capital Investments
Naiyer Jawaid on July 22, 2018 at 9:04 am
Not attractive on its financial merits.
Reply
Dr Kannan on October 20, 2019 at 6:36 am
Without knowing the discount rate and your desired rate of return (or WACC) its not sensible to reply to your query. When the NPV at your required rate of discount or return (or wacc) is zero the investment is in breakeven i.e just recover the cost with a return equivalent to your desired rate. If negative then reject the investment, If positive Accept the investment. But try to use IRR also.
Dr Kannan?Arjunan, PhD (Economics), MBA (Finance), CAIIB, B.Sc. Agri.
Brisbane, Australia?
View my research on my SSRN Author page:
https://ssrn.com/author=2637148https://rdcu.be/bidzh – Non-monotonic NPV Function Leads toSpurious NPVs and Multiple IRRReply
Harshad Dixit on February 21, 2020 at 5:18 am
Thank you for sharing Dr. Kanna, I was scratching my head over a DCF analysis with multiple IRRs and stumbled upon your paper.
Reply
BusinessBox on February 1, 2019 at 6:19 am
Excellent article on feasibility study. Keep it up.
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BusinessBox on February 1, 2019 at 6:19 am
Excellent article on feasibility study. Keep it up.
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Ice on March 11, 2019 at 7:33 am
Do you have any example for some project that has negative IRR?
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Ice on March 11, 2019 at 7:33 am
Do you have any example for some project that has negative IRR?
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Gul on March 16, 2019 at 7:12 am
Will it be effective to calculate MIRR in case of cash flows have more than one sign change?
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Dr Kannan on October 20, 2019 at 6:42 am
MIRR is a spurious rate, pls never use it.
See below: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2942456
Arjunan, Kannapiran, Modified IRR (MIRR) Is a Spurious Criterion and Should Not Be Used in Cost-Benefit Analysis (CBA) and Investment Analysis (March 28, 2017). Forthcoming in the Journal of Economic and Finance Education . Available at SSRN: https://ssrn.com/abstract=2942456 or http://dx.doi.org/10.2139/ssrn.2942456
Dr Kannan?Arjunan, PhD (Economics), MBA (Finance), CAIIB, B.Sc. Agri.
Brisbane, Australia?
View my research on my SSRN Author page:
https://ssrn.com/author=2637148https://rdcu.be/bidzh – Non-monotonic NPV Function Leads toSpurious NPVs and Multiple IRRReply
OWall on August 29, 2019 at 1:01 pm
What about in the event of a total loss? IE Recovery of 0% is your IRR then -100%? Or is it 0?
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OWall on August 29, 2019 at 1:01 pm
What about in the event of a total loss? IE Recovery of 0% is your IRR then -100%? Or is it 0?
Reply
Dr Kannan on December 9, 2019 at 11:36 pm
If sum of NCF is zero then IRR is zero. However if the sum of NCF is negative and the negative value is matching with the capital investment amount, then yes you get -100% IRR
Reply
Dr Kannan on October 20, 2019 at 6:38 am
An intelligent argument on Zero and negative IRR. Most texts miss this point.
Dr Kannan?Arjunan, PhD (Economics), MBA (Finance), CAIIB, B.Sc. Agri.
Brisbane, Australia?
View my research on my SSRN Author page:
https://ssrn.com/author=2637148https://rdcu.be/bidzh – Non-monotonic NPV Function Leads to Spurious NPVs and Multiple IRRReply
Dr Kannan on October 20, 2019 at 6:53 am
Hello Naiyer: I quote your statement above “In my opinion, it is rational to consider the IRR which is closest to the cost of capital as the ?true? IRR”. Two IRRS 6.6% AND 36.5% (This is the case discussed in A. Damodaran). I have published a paper in Australian Economic Papers in details about such issues and this specific case of IRR 6.6% and 35.5%. Please note the ACTUAL IRR IS -9%. The undiscounted NCF = -100 and that being the net loss of 10%. By discounting it works out to -9%.
Link to those papers are below:
Arjunan, Kannapiran, Non-monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A Critical Analysis to Resolve These Problems (August 3, 2018). Forthcoming in the Australian Economic Papers Journal. Available at SSRN: https://ssrn.com/abstract=3225559 or http://dx.doi.org/10.2139/ssrn.3225559
Published in the Australian Economic Papers JournalReply
Dr Kannan on October 20, 2019 at 6:38 am
An intelligent argument on Zero and negative IRR. Most texts miss this point.
Dr Kannan?Arjunan, PhD (Economics), MBA (Finance), CAIIB, B.Sc. Agri.
Brisbane, Australia?
View my research on my SSRN Author page:
https://ssrn.com/author=2637148https://rdcu.be/bidzh – Non-monotonic NPV Function Leads to Spurious NPVs and Multiple IRRReply
Kpm on November 18, 2019 at 8:49 pm
I’m trying to understand why I get a negative IRR when I have zero initial investment, positive cash flows until the final cash flow, which is negative. This can be the case when refinancing costs are financed and the new mortgage payment is lower, resulting in payment savings to the borrower, but a negative outflow because the mortgage balance is higher if the mortgage is paid off early. Is it simply mathematics where there’s 3 sign changes?
Reply
Dr Kannan on December 15, 2019 at 10:56 pm
First, DCF can estimate when there is an investment i.e. negative cashflow in year zero (investment year). If not you can onl;y calculate NPV. If you get negative IRR due to intermittent negative cashflow, then the sum of NCF must be below zero or negative.
Reply
Kpm on November 18, 2019 at 8:49 pm
I’m trying to understand why I get a negative IRR when I have zero initial investment, positive cash flows until the final cash flow, which is negative. This can be the case when refinancing costs are financed and the new mortgage payment is lower, resulting in payment savings to the borrower, but a negative outflow because the mortgage balance is higher if the mortgage is paid off early. Is it simply mathematics where there’s 3 sign changes?
Reply
Dr Kannan on December 15, 2019 at 10:56 pm
First, DCF can estimate when there is an investment i.e. negative cashflow in year zero (investment year). If not you can onl;y calculate NPV. If you get negative IRR due to intermittent negative cashflow, then the sum of NCF must be below zero or negative.
Reply
Dr Kannan on December 9, 2019 at 11:34 pm
whats your sum of NCF? If negative then IRR will be negative!
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Dr Kannan on December 9, 2019 at 11:34 pm
whats your sum of NCF? If negative then IRR will be negative!
Reply
Inayat Ali Jan on December 10, 2019 at 5:15 pm
Here is the samole example. Can anyone sol this examole with error and trail method. And use interpolitation.
A strip-mining project requires an initial investment of $60. The cash flow in the first year is $155. In the second year, the mine is depleted, but the firm has to spend $100 to restore the land.
Reply
Inayat Ali Jan on December 10, 2019 at 5:15 pm
Here is the samole example. Can anyone sol this examole with error and trail method. And use interpolitation.
A strip-mining project requires an initial investment of $60. The cash flow in the first year is $155. In the second year, the mine is depleted, but the firm has to spend $100 to restore the land.
Reply
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