ECONOMICS

Detailed explanation-1: -Note: As mentioned earlier, financing costs such as interest payments and dividends should NOT be included as part of the incremental cash flows in the calculation of the NPV of the project.

Detailed explanation-2: -Components of NPV Cash flows are any money spent or earned for the sake of the investment, including things like capital expenditures, interest, and loan payments. Each period’s cash flow includes both outflows for expenses and inflows for profits, revenue, or dividends.

Detailed explanation-3: -The NPV method results in a dollar value that a project will produce, while IRR generates the percentage return that the project is expected to create. Purpose. The NPV method focuses on project surpluses, while IRR is focused on the breakeven cash flow level of a project.

Detailed explanation-4: -What Are NPV and IRR? Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. By contrast, the internal rate of return (IRR) is a calculation used to estimate the profitability of potential investments.