M
MannyT
I have an analysis involving cashflows for two scenarios.
The ONLY difference between the two scenarios is that
Scenario1 has a gain from a sale (hence, the positive
cashflow in Year0) while Scenario2 has no gain from sale.
Scenraio1 Scenario2
Year0 $254,486 ($221,750)
Year1 $384,508 $384,508
Year2 ($13,438) ($13,438)
Year3 ($12,038) ($12,038)
Year4 ($11,258) ($11,258)
Year5 ($11,068) ($11,068)
Year6 ($11,068) ($11,068)
Year7 ($11,068) ($11,068)
Year8 ($11,068) ($11,068)
Year9 ($11,068) ($11,068)
Year10 ($376,429) ($376,429) -- these are terminal values
Using the Excel IRR function, I get the following IRRs:
IRR: Scenerio1 -3.56%
IRR: Scenario2 19.95%
The NPV for the two scenarios, using a discount rate of
11%, is as follows:
NPV: Scenario 1 $414,247
NPV: Scenario 2 ($61,989)
My question:
Given that I am getting an upfront gain from a sale in
Scenario1, shouldn't the internal rate of return be better
(i.e. higher) than Scenario2 with no upfront gain??
The higher NPV for Scenario1 makes more sense to me. What
am I missing with the IRR?
Any help/insight is appreciated.
The ONLY difference between the two scenarios is that
Scenario1 has a gain from a sale (hence, the positive
cashflow in Year0) while Scenario2 has no gain from sale.
Scenraio1 Scenario2
Year0 $254,486 ($221,750)
Year1 $384,508 $384,508
Year2 ($13,438) ($13,438)
Year3 ($12,038) ($12,038)
Year4 ($11,258) ($11,258)
Year5 ($11,068) ($11,068)
Year6 ($11,068) ($11,068)
Year7 ($11,068) ($11,068)
Year8 ($11,068) ($11,068)
Year9 ($11,068) ($11,068)
Year10 ($376,429) ($376,429) -- these are terminal values
Using the Excel IRR function, I get the following IRRs:
IRR: Scenerio1 -3.56%
IRR: Scenario2 19.95%
The NPV for the two scenarios, using a discount rate of
11%, is as follows:
NPV: Scenario 1 $414,247
NPV: Scenario 2 ($61,989)
My question:
Given that I am getting an upfront gain from a sale in
Scenario1, shouldn't the internal rate of return be better
(i.e. higher) than Scenario2 with no upfront gain??
The higher NPV for Scenario1 makes more sense to me. What
am I missing with the IRR?
Any help/insight is appreciated.