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Contravention Between NPV & IRR Due to Timing of Cash Flows: A Case of Capital Budgeting Decision of an Oil Refinery Company

Received: 17 December 2015     Accepted: 26 December 2015     Published: 18 January 2016
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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.

Published in American Journal of Theoretical and Applied Business (Volume 1, Issue 2)
DOI 10.11648/j.ajtab.20150102.13
Page(s) 48-52
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2016. Published by Science Publishing Group

Keywords

Capital Budgeting, Net Present Value, Internal Rate of Return, Timing of Cash Flows, Project

References
[1] Pandey, IM (2006), “Financial Management. Delhi: Vikash.
[2] Scheepers, Cor (2003), “Capital Finance Decisions For Project Managers– A Reflection On Current Methods,”. Acta Commercii, Vol. 3, ISSN: 2413-1903.
[3] Arshad, Asma (2012), “Net Present Value is better than Internal Rate of Return,”. Interdisciplinary Journal Of Contemporary Research In Business, VOL 4, NO 8, ISSN: 2073-7122
[4] Tufuor, Kofi, Nana, Antwi, & Doku, Ntiamoah, James (2013), “Capital Budgeting Practices In Emerging Market Economies: Evidence From Listed Ghanaian Firms.” Research Journal of Finance and Accounting, Vol. 4, No. 17, ISSN 2222-2847.
[5] Bierman Harold, Jr. “Comparing Net Present Value and Internal Rate of Return,” QFINANCE [Brochure].
[6] Lutz, Jack. (2011), “IRR vs. NPV,” Forest Research Notes. Vol 8, No 1.
[7] Lajos, Juhász (2011), “Net Present Value Versus Internal Rate of Return,” Economics & Sociology, Vol. 4, No 1,, ISSN 2071-789X, pp. 46-53.
[8] Volkman, David A (1997), “A Consistant Yield-Based Capital Budgeting Method,” Journal of Financial and Strategic Decision, Vol. 10 No. 3, pp. 76-88.
[9] Kalhoefer, Christian (2010), “Ranking of Mutually Exclusive Investment Projects – How Cash Flow Differences Can Solve The Ranking Problem,” Investment Management and Financial Innovations, Vol. 7, Issue 2, pp. 81-86.
[10] Aho, Teemu, Virtanen, Ilkka (1983), “On Realationships Between ROI and IRR Under Inflation: A Constant Real Cash-Flow Case,” Europen Journal of Operational Research, Vol. 13, pp. 256-267.
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  • APA Style

    Sayan Banerjee. (2016). Contravention Between NPV & IRR Due to Timing of Cash Flows: A Case of Capital Budgeting Decision of an Oil Refinery Company. American Journal of Theoretical and Applied Business, 1(2), 48-52. https://doi.org/10.11648/j.ajtab.20150102.13

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    ACS Style

    Sayan Banerjee. Contravention Between NPV & IRR Due to Timing of Cash Flows: A Case of Capital Budgeting Decision of an Oil Refinery Company. Am. J. Theor. Appl. Bus. 2016, 1(2), 48-52. doi: 10.11648/j.ajtab.20150102.13

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    AMA Style

    Sayan Banerjee. Contravention Between NPV & IRR Due to Timing of Cash Flows: A Case of Capital Budgeting Decision of an Oil Refinery Company. Am J Theor Appl Bus. 2016;1(2):48-52. doi: 10.11648/j.ajtab.20150102.13

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  • @article{10.11648/j.ajtab.20150102.13,
      author = {Sayan Banerjee},
      title = {Contravention Between NPV & IRR Due to Timing of Cash Flows: A Case of Capital Budgeting Decision of an Oil Refinery Company},
      journal = {American Journal of Theoretical and Applied Business},
      volume = {1},
      number = {2},
      pages = {48-52},
      doi = {10.11648/j.ajtab.20150102.13},
      url = {https://doi.org/10.11648/j.ajtab.20150102.13},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ajtab.20150102.13},
      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.},
     year = {2016}
    }
    

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    JF  - American Journal of Theoretical and Applied Business
    JO  - American Journal of Theoretical and Applied Business
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    AB  - 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.
    VL  - 1
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Author Information
  • Department of Business Management, Goenka College of Commerce & Business Administration, Kolkata, West Bengal, India

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