Abstract
Purpose of the study: This write up aims at exploring the causality between the timing of cash flows and contravention of Net Present Value and Internal Rate of Return as regards capital budgeting decision. Background of the study: It is neither too often found that Net Present Value and Internal Rate of Return are leading to neither contradiction nor have the topic been given much thrust. The endeavour is to bring this burning issue in light with the help of a practical case in an oil refinery factory. Methodology: Discounting technique has been used in the formulae to compute Net Present Value and Internal Rate of Return. Results: The study shows possibility of contravening results in case of mutually exclusive projects. Findings: It is found that due to severity of discounting factor, timing of cash flows of projects lead to contradicting results as depicted by Net Present Value and Internal Rate of Return.
Highlights
The corporate finance observes capital budgeting is encompassed by project recognition, project expansion, choice of project and project control
Many of these researches are directed towards various evaluation methods such as payback, internal rate of return (IRR), net present value (NPV), discounted payback, profitability index (PI)
Marc Ross (1986) In an in-depth study of the capital budgeting projects of 12 large manufacturing firms and the results showed that firms relied rather heavily on the simplistic payback model, especially for smaller projects
Summary
The corporate finance observes capital budgeting is encompassed by project recognition, project expansion, choice of project and project control. Capital budgeting decision is one of the most important and critical decisions that a finance manager has to take. It is through capital budgeting decision a firm selects the best possible investment avenues (Projects) to deploy its funds into long term assets. Conventional Investments (Projects): In a conventional project cash outlay occurs at the initial stage and thereafter all the cash flows take the form of cash inflows. It follows the pattern of -++++++ sign (where – sign implies cash outflow and +implies cash inflow). Sayan Banerjee: Contravention Between NPV & IRR Due to Timing of Cash Flows:
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