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Hi,
(1)
“NPV method looks at the absolute increase in wealth of the shareholders and thus can be used to compare projects of different sizes. IRR looks at the relative rate of returns and in doing so ignores the relative size of the compared investment projects.”What does the SIZE here mean? Is it the amount in $ ?
(2)
“IRR assumes that the cash inflows generated during the life of the project will be reinvested at the project’s IRR. NPV assumes reinvestment rate equals to the cost of capital.”What does reinvestment assumption mean? But we didn’t reinvest anything when doing calculation for IRR and NPV?
1. Yes, size is meaning the total amount in $’s.
2. If we use the IRR to compare between projects then it is only valid if we assume that the receipts from the project are all reinvested so as to continue earning at the same rate as the IRR.
I do explain this in my lectures.
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