In one of the Scenarios I ran for a valuation, I reduced sales every year by 2% and the resulting IRR is 10% equal to the discount rate I used. Company has no debt, so IRR is equal to the cost of equity.
Is this a good thing?
I interpret it as "even in the downside scenario" we will still have met the shareholders expected return. I'm I right?
Bumpy road?!
Your IRR tells you the discount rate, which would yield an NPV of 0.
The higher the IRR, the higher the upside "cushion" for your cost of capital as it marks the pivot at which your NPV turns negative. Likewise, the higher the IRR, the more profitable a project is deemed on a relative basis. (NPV lacks this power of comparison for projects of different length and scale, due to the fact that it is just an absolute number)
Now, on to the scenario question: Your downside scenario sets the discount rate equal to the IRR. All this says is that the downside scenario for capital costs is located at this turning point.
You're statement is thereby: In the worst case imaginable, my cost of capital will be @ x%, setting the NPV of the project to 0. Investors win nothing vs. an investment of comparable risk, but they also lose nothing compared to the similar investment. The returns should come out as expected for an asset of this risk class. Wether this is good or not depends on the other projects, how they see their own risk (which is funneled into the cost of capital) and how aggressively they will forecast their operating model (will determine where THEY see their downside scenario located).
whoops, i actually meant: the downside scenario for cash flows is located at such a turning point, that sets the IRR equal to the discount rate.
You mean I should rather rephrase to; "we are able to deliver your expected return in this scenario, although there are many assets that can beat this?"
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