Given the situation we are experiencing, with the health and economic crisis that has occurred, how would you include its effects in the evaluation of a project with the criteria of the NPV and the IRR? Would it affect only net cash flows, or also the discount rate? Saving Changes...
The discount rate is absolutely affected because it is the interest rate you could earn on that money, and banks are lowering the interest rates to encourage borrowing. Interest rates also fluctuate more during economic cries so when making calculations based on the time value of money, you are speculating on what you think the interest rate will be during the calculation period. Saving Changes...
It will absolutely affect NPV calculations because the discount rate (r) in the NPV formula is the assumed interest rate. If you assume the interest rates change, then r changes for different time periods.
For IRR, you set NPV to zero and calculate the equivalent discount rate. If the IRR cash flows include paying interest on a loan at a variable rate or unspent budget that is still earning interest, the rates still change so your money flow changes based on fluctuating interest and that will affect the IRR also.
You can however just assume a constant interest rate for either calculation since you are guessing about the future. In that case the the economic conditions won't affect either calculation, but the validity of the results will only be as good as your guess at the future interest rates. Saving Changes...
Yes both are getting affected. But in the current situation, you need to keep an eye on on these calculations and revisit them periodically to ensure you are not deviating too much to ensure viability of your project accordingly.
You can also include them in your project OPL to ensure that you have a clear check on these aspects.
I would also consider this as project risk and discuss this with relevant stakeholders to define a possible mitigation and contingency plan. Saving Changes...
Thanks for your contribution Tarun. Saving Changes...
Sergio Luis ConteHelping to create solutions for everyone| Worldwide based OrganizationsBuenos Aires, Argentina
The problem is evaluate project with things like NPV and IRR without taken into account the conditions that direct impact in calculation. For example, in countries that belongs to LATAM it has not much sense to evaluate projects with this metrics. So, nothing new below the sun, with o without Corona Virus. Saving Changes...
