Assignment

Name: Nirmal Jyoti

Roll No.: 43
Subject: Corporate Valuation

1) What is M&A & give example.

Ans. M&A stands for Mergers and Acquisitions. It refers to the process where two
companies combine (merge) or one company purchases another (acquisition). M&A
activities are often driven by strategic reasons, such as expanding market reach, increasing
operational efficiencies, acquiring new technologies, or achieving synergies that can lead to
increased profitability.

Key Concepts

 Merger: This occurs when two companies combine to form a new entity. In a merger,
both companies typically agree to move forward as a single new company rather than
remain separately owned and operated.
 Acquisition: This occurs when one company buys another company. The acquiring
company takes control of the target company, which may continue to operate under its
own brand or be absorbed into the acquiring company.

Example of M&A

Example: In 2016, Microsoft acquired LinkedIn for approximately $26.2 billion.

 Reason: The acquisition aimed to integrate LinkedIn's vast professional network with
Microsoft's suite of products and services, enhancing their offerings in areas such as
cloud computing and enterprise solutions.
 Impact: This acquisition allowed Microsoft to leverage LinkedIn's user data and
strengthen its position in the business and social networking domains.

Q.2) Types of M&A

Ans. 1. Horizontal Mergers

Definition: Mergers between companies that operate in the same industry and are at the
same stage of production. This type of merger aims to consolidate market power and reduce
competition.

2. Vertical Mergers
Definition: Mergers between companies that operate at different stages of the production
process within the same industry. This type of merger seeks to improve supply chain
efficiency and control over the production process.

3. Conglomerate Mergers

Definition: Mergers between companies that are in unrelated businesses. This type of merger
aims to diversify the product offerings and reduce overall business risk.

4. Market Extension Mergers

Definition: Mergers between companies that sell the same products but operate in different
geographical markets. This type of merger is intended to expand market reach and customer
base.

5. Product Extension Mergers

Definition: Mergers between companies that sell different but related products within the
same market. This type of merger aims to broaden the range of products offered to
consumers.

6. Reverse Merger

Definition: A transaction in which a private company acquires a public company to gain

access to public markets without going through the traditional initial public offering (IPO)
process.

7. Friendly vs. Hostile Mergers

 Friendly Merger: A merger that occurs with the consent and agreement of both
companies involved.
 Hostile Merger: A merger that is pursued against the wishes of the target company's
management, often involving direct appeals to shareholders.

8. Leveraged Buyout (LBO)

Definition: An acquisition of a company using a significant amount of borrowed funds,

where the acquired company's assets often serve as collateral for the loans. This is typically
pursued to take the company private.

9. Strategic Alliances

Definition: Collaborative agreements between two or more companies to pursue a shared

objective while remaining independent. Although not technically a merger or acquisition,
strategic alliances can create synergies similar to those achieved through M&A.

Q.3) Feature, challenges of M&A

Ans.

1. Strategic Growth:
o M&A allows companies to achieve rapid growth and expand their market
presence without starting new operations from scratch.
2. Diversification:
o Companies can diversify their product lines, services, and market segments to
reduce risks associated with market fluctuations.
3. Increased Market Share:
o Mergers and acquisitions can significantly increase a company’s market share,
enhancing its competitive advantage.
4. Access to New Technologies:
o M&A can provide access to new technologies, intellectual property, and
expertise that can drive innovation.
5. Operational Synergies:
o M&A often leads to synergies, where combined operations can reduce costs,
improve efficiency, and enhance profitability.
6. Financial Strength:
o Merging with or acquiring another company can improve financial stability and
provide access to additional capital.
7. Enhanced Customer Base:
o Companies can acquire a new customer base, leading to increased sales and
market penetration.
8. Geographical Expansion:
o M&A can facilitate entry into new geographical markets, allowing companies to
tap into emerging markets.

Challenges of Mergers and Acquisitions (M&A)

1. Cultural Integration:
o Merging different corporate cultures can lead to conflicts, employee
dissatisfaction, and reduced productivity.
2. Regulatory Hurdles:
o M&A activities often face scrutiny from regulatory bodies to prevent
monopolistic practices, which can delay or block transactions.
3. Valuation Issues:
o Accurately valuing the target company can be challenging, and disagreements
on valuation can hinder negotiations.
4. High Costs:
o M&A transactions can incur significant costs, including legal fees, due
diligence, and integration expenses, which may outweigh the benefits.
5. Operational Disruptions:
o The integration process can disrupt normal operations, leading to a decline in
performance and customer satisfaction.
6. Loss of Key Personnel:
o Mergers and acquisitions can lead to uncertainty among employees, resulting in
the loss of key talent and institutional knowledge.
7. Overestimation of Synergies:
 o Companies may overestimate potential synergies and savings, leading to
disappointing financial results post-merger.
8. Debt Burden:
o In leveraged buyouts (LBOs), the significant debt incurred to finance the
acquisition can strain the company’s finances and operations.
9. Market Reaction:
o The market may react negatively to an M&A announcement, affecting the stock
prices of both the acquiring and target companies.

Q.4) Objective of M&A

Ans.  Market Expansion: Enter new geographical markets to increase reach and revenue.

 Increased Market Share: Consolidate position by acquiring competitors and reducing

competition.

 Diversification: Broaden product lines or services to mitigate risks and reduce

dependency on a single market.

 Access to Technology: Acquire innovative technologies and capabilities to enhance

product offerings.

 Operational Synergies: Achieve cost savings and efficiency improvements through

streamlined operations.

 Financial Strength: Improve overall financial stability and access additional capital
resources.

 Talent Acquisition: Acquire skilled personnel and intellectual capital to boost innovation
and productivity.

 Customer Base Expansion: Gain a larger or new customer base for increased sales
opportunities.

 Risk Management: Diversify investments to buffer against market volatility and

uncertainties.

 Competitive Advantage: Create or strengthen advantages over rivals through enhanced

capabilities or offerings.

Q.5) Equity and Debt & Converting share

Ans. Equity

Equity represents ownership in a company through shares. Shareholders benefit from

dividends and capital appreciation if the company performs well. However, equity carries
higher risk as shareholders are the last to be paid in case of liquidation. It includes common
stock, which often comes with voting rights, and preferred stock, which typically has fixed
dividends but no voting power. Equity holders have a direct stake in the company's future
growth.

Debt

Debt refers to borrowed funds that a company must repay with interest, such as loans or
bonds. Debt holders do not own any part of the company but are entitled to regular interest
payments. They are paid before equity holders in the event of bankruptcy, making debt a
safer investment. However, debt does not offer the growth potential of equity, as returns are
fixed. The company is legally obligated to repay debt regardless of performance.

Convertible Shares

Convertible shares are hybrid instruments that start as debt or preferred stock but can later be
converted into common equity. Investors enjoy fixed income (from interest or dividends)
initially, with the option to convert into shares if the company performs well. This provides
both stability and the opportunity for future growth. The conversion rate is predetermined,
allowing investors to benefit from rising stock prices. It offers the best of both debt and
equity.

Q.6) Steps of M&A

Ans.

1. Strategy Development: The acquiring company defines its strategic goals and
identifies potential target companies.
2. Target Identification: A list of targets is created, and potential candidates are
evaluated based on financial and strategic fit.
3. Valuation and Offer: The acquirer values the target and makes a preliminary offer,
using cash, stock, or a combination.
4. Negotiation: Both parties negotiate terms such as price, structure, and conditions of
the deal.
5. Due Diligence: A detailed investigation of the target’s financials, operations, and risks
is conducted.
6. Financing: The acquiring company arranges funding for the deal, through cash, debt,
or issuing new equity.
7. Regulatory Approval: The deal undergoes legal and regulatory review and approvals.
8. Closing: Both parties finalize the transaction, transferring ownership.
9. Integration: The acquirer integrates the target company into its operations.
10.Post-Merger Review: A review is conducted to evaluate the success of the merger
and lessons learned.

Q.7) Factor of M&A

Ans.  Strategic Fit: The alignment of the target company’s operations, market position, or
technology with the acquirer's goals.
 Valuation: Correctly assessing the value of the target to avoid overpaying.
 Cultural Compatibility: Ensuring the corporate cultures of both companies can integrate
smoothly.
 Due Diligence: Investigating the target's financials, legal liabilities, and operational risks.
 Regulatory Environment: Compliance with legal, antitrust, and industry regulations.
 Financing: Securing the necessary funds to complete the deal, either through cash, debt,
or equity.
 Synergy Realization: Achieving cost savings, increased revenues, or other benefits from
the merger.
 Post-Merger Integration: Successfully merging the two companies’ operations, cultures,
and systems to maximize value.
Q.8) Types of finance?
Ans.  Personal Finance: Managing individual or household money, including budgeting,
saving, investing, and planning for retirement.
 Corporate Finance: Managing a company's finances, including capital raising,
investment decisions, and managing assets/liabilities.
 Public Finance: Managing government revenue and expenditures, including taxation,
budgeting, and public investment.
 Debt Finance: Raising funds through borrowing (loans, bonds) that must be repaid with
interest.
 Equity Finance: Raising funds by selling ownership shares in a company (stock).
 Venture Capital: Investment in startups or early-stage companies with high growth
potential.
 Crowdfunding: Raising small amounts of capital from a large number of people,
typically via online platforms.
 Trade Finance: Facilitating international trade by offering financial products like letters
of credit or factoring.
Q.9) Short Note With Example :- Restructuring Debts

Ans. Debt restructuring is a process used by companies or individuals facing financial

difficulties to renegotiate the terms of their existing debt obligations. The goal is to make the
debt more manageable by reducing the burden through changes in interest rates, repayment
schedules, or converting debt to equity. Restructuring helps avoid bankruptcy and provides a
more feasible way for the debtor to repay creditors while maintaining business operations.

Example:

A company with $10 million in loans is struggling to meet its monthly payments due to
declining revenues. Instead of defaulting, the company negotiates with its lenders to extend
the repayment period from 5 to 10 years, reducing its monthly payments. Additionally, the
interest rate is lowered from 8% to 5%, making the debt more affordable. In some cases,
part of the debt might also be converted into company shares, giving the lender an equity
stake in the company instead of expecting full repayment in cash.
Q.10) Post mergers performance analysis

Ans. Post-mergers performance analysis evaluates the success of a merger or acquisition

after its completion. Key aspects include:

1. Financial Performance: Assessing revenue growth, cost savings, and profitability

compared to pre-merger levels.
2. Operational Integration: Measuring efficiency improvements and supply chain
optimization to determine operational success.
3. Market Position: Analyzing changes in market share and customer retention to
evaluate competitive strength.
4. Cultural Integration: Monitoring employee engagement and retention rates to assess
the effectiveness of cultural merging.
5. Strategic Goals Achievement: Evaluating if anticipated synergies and long-term
growth objectives were met.

Example:

After a merger between two tech firms, the analysis might show a 20% revenue increase
and $5 million in cost synergies but also highlight a 15% rise in employee turnover,
indicating challenges in cultural integration. This analysis informs future strategic
adjustments and decisions.

Q.11) Approach to valuation

Ans. Valuation is the process of determining the worth of an asset, company, or investment.
Common approaches include:

1. Income Approach: Values an asset based on its expected future cash flows,
discounted back to their present value. This method is often used for businesses and
real estate.
2. Market Approach: Compares the asset to similar assets that have been sold recently.
It often uses multiples (like price-to-earnings) derived from comparable companies to
estimate value.
3. Asset-Based Approach: Values a company based on the net value of its assets,
subtracting liabilities. This method is useful for companies with significant tangible
assets.
4. Discounted Cash Flow (DCF): A specific income approach that projects future cash
flows and discounts them to present value using a required rate of return.
5. Precedent Transactions: Analyzes historical sales of similar companies to determine
a valuation range based on what buyers have previously paid.
 Example: For a tech start-up, the DCF method may estimate its value based on projected
cash flows from new product launches, while the market approach could look at
valuation multiples of similar tech companies that were recently acquired.

Q.12) Market based approaches

Ans. Market-based approaches to valuation assess an asset's worth by comparing it to similar

assets in the market. Key methods include:

1. Comparable Company Analysis (Comps): This method evaluates the valuation

multiples (like Price-to-Earnings, EV/EBITDA) of publicly traded companies in the
same industry to estimate the value of the target company.
2. Precedent Transactions: This approach looks at the prices paid for similar companies
in past transactions to establish a valuation benchmark, considering factors like size,
industry, and market conditions at the time of sale.
3. Market Capitalization: For publicly traded companies, market cap is calculated by
multiplying the current share price by the total number of outstanding shares,
providing a quick valuation based on the market's perception of the company's worth.
4. Industry Multiples: This method uses specific industry metrics to value a company,
relying on averages from similar businesses to derive value estimates.

Example: If a company in the tech industry has a Price-to-Earnings (P/E) ratio of 15, and
comparable companies in the same sector have P/E ratios ranging from 12 to 18, this
analysis can help determine a reasonable valuation range for the target company based on
these multiples.

Q.13) Valuation process

Ans. 1. Initial Steps

 Define Purpose: Identify why the valuation is being conducted (e.g., M&A,
investment, reporting).
 Gather Information: Collect historical financial statements, operational data, and
management projections.

2. Analysis Phase

 Review Historical Performance: Analyze trends in revenue, profit margins, and cash
flows.
 Conduct Market Analysis: Assess industry dynamics, competitive landscape, and
market conditions.

3. Apply Valuation Methods

Select Methods: Choose appropriate valuation methods (e.g., DCF, Comparable Company
Analysis, Precedent Transactions, Asset-Based Valuation).

 Perform Valuation:
 o DCF: Project future cash flows, determine the discount rate, and calculate
present value.
o CCA: Identify peer companies, calculate multiples, and apply them to the
target.
o Precedent Transactions: Identify relevant transactions and derive multiples for
the target.
o Asset-Based: Assess and value tangible and intangible assets, then deduct
liabilities.

4. Final Steps

 Adjust for Premiums/Discounts: Consider control premiums, minority discounts,

and potential synergies.
 Conduct Sensitivity Analysis: Test the impact of key assumptions on the valuation.
 Review and Validate: Ensure the valuation is accurate and aligns with market
conditions.
 Prepare Report: Summarize findings, methods, and final estimated value for
stakeholders.

Q.14) Uses of valuation

Ans. Uses of Valuation (In Short)

1. Mergers and Acquisitions (M&A): To determine the fair price for buying or selling a
business, helping both parties negotiate effectively.
2. Investment Analysis: To assess the value of stocks, bonds, and other securities,
guiding investment decisions.
3. Financial Reporting: To provide accurate valuations for assets and liabilities on
financial statements, ensuring compliance with accounting standards.
4. Taxation: To establish the value of assets for tax purposes, such as estate taxes, gift
taxes, and corporate taxes.
5. Business Planning: To aid in strategic planning and decision-making, providing
insights into growth opportunities and resource allocation.
6. Litigation Support: To resolve disputes in legal cases, such as divorce settlements or
shareholder disagreements, by providing a fair value assessment.
7. Capital Raising: To determine the value of a business when seeking investment or
loans, ensuring fair terms for all parties involved.
8. Employee Compensation: To evaluate stock options and other equity-based
compensation packages for employees.
 Q.15) Importance of Valuation
Ans.
1. Informed Decision-Making: Valuation provides a clear picture of an asset's worth,
enabling stakeholders to make informed investment, acquisition, or divestment
decisions.

2. Fair Pricing: It ensures that buyers and sellers can negotiate a fair price in

transactions, such as mergers and acquisitions, thus preventing overpayment or

undervaluation.
3. Financial Reporting: Accurate valuations are crucial for financial statements,

ensuring compliance with accounting standards and providing stakeholders with

reliable information.
4. Risk Assessment: Valuation helps identify potential risks and rewards associated with

an investment, enabling better risk management and strategic planning.

5. Tax Compliance: Proper valuation is essential for determining tax liabilities related to

assets, ensuring compliance with tax regulations and minimizing disputes with tax
authorities.
6. Strategic Planning: Valuation aids businesses in assessing their market position and

identifying growth opportunities, helping in long-term strategic planning and resource

allocation.

Q.16) Short Note on :- 1. Discounted Technique

2. Non Discounted Technique

Ans. Discounted Technique (Short Note)

The discounted technique refers to valuation methods that estimate the present value of
future cash flows or earnings. This approach is based on the principle that money today is
worth more than the same amount in the future due to its potential earning capacity. The
most common method under this category is the Discounted Cash Flow (DCF) analysis,
which projects future cash flows and discounts them back to the present using a discount
rate, typically reflecting the cost of capital or required rate of return. This technique is widely
used for valuing companies, investment projects, and financial assets, providing a detailed
understanding of the asset’s intrinsic value.
Example:

In a DCF analysis, if a company is projected to generate $1 million in cash flow next year,
and the discount rate is 10%, the present value of that cash flow would be approximately
$909,090.

2. Non-Discounted Technique (Short Note)

The non-discounted technique involves valuation methods that do not consider the time
value of money when assessing the value of an asset. These techniques are simpler and often
rely on current or historical data rather than future projections. Common methods include
market comparisons (like Comparable Company Analysis) and asset-based valuations,
which assess the value based on the net asset value or liquidation value without discounting
future earnings.

Example:

Using a non-discounted approach, if a company’s assets are valued at $5 million and its
liabilities at $2 million, the net asset value would be $3 million, reflecting the company's
worth based solely on its current assets and liabilities.

Q.17) Concept of Payback period with example

Ans. The payback period is a financial metric used to determine the time it takes for an
investment to generate enough cash flows to recover its initial cost. It is a simple and
commonly used method for assessing the feasibility of an investment project. The payback
period is calculated by adding up the cash inflows generated by the investment until they
equal the initial investment amount.

Key Features:

 Simple Calculation: Easy to understand and calculate.

 Risk Assessment: Shorter payback periods are generally preferred as they indicate
quicker recovery of investment, reducing risk.
 Limitations: The payback period does not consider the time value of money, cash
flows beyond the payback period, or overall profitability.

Example:

If a company invests $50,000 in a machine that generates $15,000 annually:

1. Year 1: $15,000 (cumulative: $15,000)

2. Year 2: $15,000 (cumulative: $30,000)
3. Year 3: $15,000 (cumulative: $45,000)
4. Year 4: $15,000 (cumulative: $60,000)

After 3 years, $45,000 is recovered. In Year 4, it generates $15,000, so to recover the

remaining $5,000, it takes an additional 0.33 years.
Total Payback Period:
3.33 years (or approximately 3 years and 4 months). This indicates how long it will take to
recover the initial investment.

Q.18) Differences between :-Payback period v/s ARR

Ans.
Q.19) Reason of investment purpose and sale
Ans. Reasons for Investment:

1. Wealth Creation: Many individuals and organizations invest with the goal of growing
their wealth over time. Investments in stocks, bonds, or real estate are common
vehicles for long-term wealth creation.
2. Income Generation: Investors may seek investments that generate regular income,
such as dividend-paying stocks, bonds, or rental properties. This provides a steady
cash flow, often used for retirement or daily expenses.
3. Capital Appreciation: Investing in assets that are expected to increase in value over
time can lead to significant gains when sold in the future. For example, equity
investments in growing companies or real estate in appreciating areas.
4. Diversification: Investors often spread their investments across different asset classes
to reduce risk. This strategy helps protect against volatility in any one sector or asset
type.
5. Tax Benefits: Certain investments offer tax incentives, like retirement accounts
(IRAs) or tax-free bonds, which reduce the investor's overall tax burden.
6. Retirement Planning: Many people invest with the long-term goal of securing their
financial future after retirement, choosing vehicles like pension funds, mutual funds,
or stocks that grow over time.

Reasons for Sale:

1. Profit-Taking: Investors often sell assets to realize gains, particularly when an

investment has appreciated significantly. This is common during market highs when
they want to lock in profits.
2. Need for Liquidity: Investors might sell assets to free up cash for personal needs,
such as funding a new business, purchasing a home, or covering unexpected expenses.
3. Portfolio Rebalancing: To maintain a certain asset allocation (e.g., 60% stocks, 40%
bonds), investors may sell overperforming assets and buy underperforming ones,
ensuring their portfolio stays in line with their goals.
4. Risk Management: If an investor feels that a particular asset or the market in general
has become too risky, they might sell to avoid potential losses. This is especially true
during economic downturns or after a company faces negative news.
5. Tax-Loss Harvesting: Investors may sell losing investments to offset taxable gains
elsewhere in their portfolio, which reduces their overall tax liability.
6. Changes in Financial Goals: As life circumstances change, such as retirement or
starting a new business, investors might shift their strategy and sell assets that no
longer fit their financial objectives.
7. Company or Market Underperformance: If an investment is underperforming or if
market conditions are unfavorable, investors may sell to prevent further losses.
8. Exit Strategy: For private equity or venture capital investors, the sale of an
investment could be part of their exit strategy, especially when the company they’ve
invested in is acquired or goes public.

Q.20) What is constraints in individual and company

Constraints for Individuals:
 1. Income Limitations: Limited earnings or salary impacts spending and investing
capacity.
2. Debt: Existing loans or credit obligations restrict disposable income.
3. Risk Tolerance: Personal comfort with risk limits investment choices.
4. Time Horizon: Shorter time frames reduce long-term investment opportunities.
5. Legal/Tax Obligations: Legal requirements and taxes may restrict certain financial
actions.
6. Health: Health issues can impact earning potential and financial goals.

Constraints for Companies:

1. Financial Resources: Limited capital affects business operations and growth.

2. Market Competition: Rival businesses constrain market share and profitability.
3. Regulatory Environment: Laws and regulations limit business activities.
4. Operational Capacity: Workforce, production, and infrastructure can restrict scaling.
5. Economic Conditions: Economic downturns or inflation affect profitability.
6. Stakeholder Expectations: Shareholders, customers, and employees create pressures
on business decisions.

Q.21) Valuation report for M& A deals involves several key components.

Ans. A valuation report for Mergers and Acquisitions (M&A) deals includes several key
components to ensure a comprehensive assessment of the target company's worth. Here are
the main elements:

1. Executive Summary

 Overview of the Deal: Brief description of the companies involved, the nature of the
deal, and key transaction details.
 Objectives: Purpose of the valuation (e.g., merger, acquisition, restructuring).

2. Company Analysis

 Business Overview: Detailed description of the target company’s products, services,

market position, and competitive advantages.
 Financial Performance: Past financial statements (income statement, balance sheet,
and cash flow), key financial metrics, and growth trends.
 Management Team: Evaluation of the management’s capability and experience.

3. Industry and Market Analysis

 Market Trends: Analysis of the industry landscape, growth prospects, and relevant
trends affecting the sector.
 Competitive Positioning: Market share, key competitors, and barriers to entry.

4. Valuation Methods

 Discounted Cash Flow (DCF) Analysis: Estimation of future cash flows and
discounting them to present value.
  Comparable Companies Analysis (Comps): Comparison to similar companies using
key financial ratios and multiples (e.g., P/E ratio, EBITDA multiple).
 Precedent Transactions: Review of similar M&A transactions to estimate value
based on historical deal multiples.
 Asset-Based Valuation: Valuation based on the company’s net assets or liquidation
value.

5. Synergies Analysis

 Cost and Revenue Synergies: Potential benefits from merging the companies, such as
cost savings or increased revenues.
 Integration Costs: Costs involved in integrating the businesses post-merger.

6. Risk Factors

 Operational Risks: Issues related to the target company’s operations, supply chain, or
management.
 Market Risks: Risks related to market conditions, industry changes, or competitor
actions.
 Financial Risks: Debt levels, cash flow volatility, and exposure to economic changes.

7. Deal Structure and Terms

 Transaction Structure: Cash, stock, or a combination; how the deal will be financed.
 Consideration: Terms of payment and any contingencies (e.g., earn-outs, retention
bonuses).
 Regulatory and Legal Considerations: Any regulatory approvals or legal issues to
address.

8. Conclusion and Valuation Range

 Valuation Summary: Final valuation estimates with a range based on the various
methods used.
 Recommendation: Whether to proceed with the deal, renegotiate terms, or walk
away.

Q.22) Accounting Rate of return

Ans. The Accounting Rate of Return (ARR) is a financial metric used to measure the
profitability of an investment or project. It expresses the expected average annual accounting
profit as a percentage of the initial investment. Unlike other return metrics, ARR uses
accounting profits rather than cash flows, making it a simpler and more accessible
calculation for some.

Formula:

ARR=(Average Annual Accounting )×100/ {Initial Investment}

Q.23) Explain the discounting factor
Ans. Discounting Factor

The discounting factor is a multiplier used to convert future cash flows into their present
value. It reflects the concept that money today is worth more than the same amount in the
future due to the time value of money. The discounting factor is based on a given discount
rate, which is usually the required rate of return or the cost of capital.

Formula:

Discounting Factor=1/(1+r)t

Where:

 r is the discount rate (required rate of return).

 t is the time period in years.

Q.24) Why are IRR is better than NPV

Ans. Although both the Internal Rate of Return (IRR) and Net Present Value (NPV) are
widely used in evaluating investment projects, IRR can be considered better in certain
situations for the following reasons:

1. Ease of Comparison: IRR provides a single percentage that represents the

profitability of an investment, making it easier to compare across multiple projects or
against a company’s required rate of return (hurdle rate).
2. Intuitive Interpretation: The IRR is easy to understand since it gives the return in
percentage terms, while NPV provides a dollar amount which may be less intuitive for
decision-makers.
3. No Assumption on Discount Rate: IRR does not require a predetermined discount
rate like NPV. It is the discount rate at which the NPV becomes zero, simplifying the
decision when the required rate of return is uncertain.

Q.25 )Differences between NPV & IRR

Ans.