One of the big subjects in Europe these days are negative interest rates, where depositors are actually charged to keep money in their account. I encountered an interesting question yesterday, if we base our IRR on the banks interest rates, will this affect the use of NPV when the r is less than zero?
Pardon my napkin-drawing.
I have often used the following as a control-question when considering investments in new technology: “Will this investment benefit us more than puting money in the bank?” If not, then reevaluate. With negative interest rates as a foreshadowing of a potential future I am left with more questions than answers.
One thing is for sure, I was not prepared for the practical implications of negative interest rates in any of my textbooks on valuation and corporate finance in school other than with a negative discount rate the NPV goes way up, WACC goes significantly down! This makes “every” investment look great i theory, and how this should be interpreted i reality should be interesting to see. Or perhaps I am just bored on the plane and creating problems based on my limited knowledge of finance.