Finance Question

[Msillah]

Is it possible to have a negative npv and a positive irr?

[dczech09]

Well IRR is the discount rate that would make a stream of income or payments equal a net present value of 0. So even if with a positive IRR, the NPV will be 0 which is neither positive or negative.

The only situation I can think of is if you have two completely separate cash streams. However I assume you are talking one cash stream having a positive IRR and negative NPV

So I am gonna say "no" unless someone could point out a mythical situation in which this would be possible.

[jpg7n16]

Yes. Anytime your required rate of return is higher than your internal rate of return, the NPV will be negative.

Like dczech said, IRR is the rate that gets NPV = 0.

But an NPV calc doesn't use the rate from the IRR calc. It uses the rate from your required return.

They are two separate calculations on the same cashflows.

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For the mythical scenario, see below!

Imagine you had the opportunity to pay $15,000 today for 10 years of $2,000 payments.

CashFlows
CF0 = -15,000
CF1-10= 2,000

1) What is the IRR? +5.6%
2) What is the NPV if your required return is 8%? -$1,462.81
3) What is the NPV if your required return is 3%? +$2,000.39


The higher your required return, the lower the NPV. The lower your required return, the higher the NPV. But your required return has no effect on the IRR. The internal return is what it is.

Should you take my mythical business proposal? That depends on your required return. If you require more than 5.6% on your money, no you should not (notice the NPV calcs confirm this with a negative result). Otherwise, yes. The 5.6% is more than you require, so you should take the opportunity.


FYI - this is the last homework problem I'll help you with

[JBlock]

I can't grasp the meaning of IRR. What are its advantages?

[jpg7n16]

I can't grasp the meaning of IRR. What are its advantages?

Advantages compared to what?

IRR = internal rate of return

IRR is a calculation. Your question is like asking "what are the advantages of addition?"

To read more about IRR:
Internal Rate Of Return (IRR) Definition | Investopedia