Finance related..Capital budgeting?
noted from the text book adage that whenever there is a conflict between IRR and NPV method, NPY other prevail because of the reinvestment assumption.
Anyone knows how does it works? appreciate if exaple is given.
Thanks
Answers: The NPV method uses depreciation contained by the net present good point analysis, whereas the IRR does not.
If you bought a piece of equipment for 5,000 with a 5 year enthusiasm, depreciation of 1,000 per year is actually a "non-cash" expense which mechanism it shows on the inc statement but is not an out of pocket expense. And for cash flow purposes, depreciation is a true Source of Funds, and thus provides funds over the the existence of the depreciated asset in charge to fund your reinvestment in latest equipment 5 years down the road.
Hope this helps, Bill.
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Anyone knows how does it works? appreciate if exaple is given.
Thanks
Answers: The NPV method uses depreciation contained by the net present good point analysis, whereas the IRR does not.
If you bought a piece of equipment for 5,000 with a 5 year enthusiasm, depreciation of 1,000 per year is actually a "non-cash" expense which mechanism it shows on the inc statement but is not an out of pocket expense. And for cash flow purposes, depreciation is a true Source of Funds, and thus provides funds over the the existence of the depreciated asset in charge to fund your reinvestment in latest equipment 5 years down the road.
Hope this helps, Bill.