MGT201 Financial Management GDB 1 Solution Spring 2014

Omer is a fresh MBA in finance from a reputable institute. Upon applying for various jobs, he receives a call for interview for a managerial post from a good investment company. He appears for the interview where to test his knowledge, interview board gives him following two statements for analyzing whether they are true or false and why.

1.     Discount rate is always needed for computing NPV of a project; however, IRR can be computed without referring to the discount rate.

Answer. Yes, NPV can not be calculated without the discount rate. IRR (Internal rate of return) is calculated to find out the rate of return (discount rate).

2.     Since, discount rate is not used when applying IRR, IRR rule is considered easier to apply than the NPV rule.

Now assuming yourself in the same situation, what would be your response to the provided statements?

Answer. No, computing the IRR is a hit and trial method in which estimated rate of return is computed and multiple/numerous calculations are made to find out NPV=IRR=0. Thus it is not considered easy.

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