In investment decision analysis you may need to calculate internal rate of return. “Internal rate of return (IRR) is the discount rate that gives the project a zero NPV” (McLaney, 2006). It is a good choice to use for investment projects. There is a formula for the internal rate of return:

(A is the lower discount rate and B is the higher rate, a is the NPV at the lower rate and b is the NPV at the higher rate.) For example the Net Present Value (NPV) is 88 when the discount rate is 20%, and the NPV is 12 when the discount rate is 30%. Therefore the IRR in this situation is 28.8%. The consequence should be compared with the rate of return which the company’s required. If the IRR higher than that, the project should be accepted otherwise it will not be accepted.

From our lecturer Linda’s lectures we knew that there are some advantages and disadvantages. The internal rate of return is simple to interpret and calculate which more easily understand than some other methods; and it is good if it uses with NPV. However there are some drawbacks as well: the output is a percentage rather than the physical size of the earnings; it may produce more than one rate of return which may make the user confused; some managers may not familiar with this method and it is difficult to calculate by hand. The internal rate of return approach is usually used for a corporation’s investment.

NPV and IRR take full account of cash flows and the time value of money. When we use NPV to decide whether the project will be accepted or not, the condition is that NPV should above 0. Otherwise the investment should be rejected. In the same situation, it is better to use the project which NPV is higher than others. However if we use IRR approach, the rate should be higher than what the company requires. Eddie McLaney (2006) mentioned that IRR cannot deal with different required rates of return which Pike, R & Neale, B (2006) have pointed out in four areas:...

...value.
B. internalrate of return.
C. accounting return.
D. profitability index.
E. payback period.
The internalrate of return is defined as the:
A. maximum rate of return a firm expects to earn on a project.
B. rate of return a project will generate if the project in financed solely with internal funds.
C. discount...

...InternalRate of Return (IRR) and Net Present Value (NPV) are both powerful tools used in business to determine whether or not to invest in a particular project; both methods have its pros and cons. If given a choice I would choose NPV, because of the potential to anticipate profitability.
As it is assumed that the objective of a firm is to create as much shareholder wealth as possible for its owners through the efficient use of resources, the...

...cost the amount of $ 60,000. The discount rate is 10%. The cash flows before depreciation and tax are as follows:
Year Proposal A Proposal B
$ $
0 (60,000) (60,000)
1 18,000 19,000
2 15,000 17,000
3 18,000 19,000
4 16,000 14,000
5 19,000 15,000
6 14,000 13,000
Evaluate the above proposals according to:
1. Pay Back Period.
2. Accounting Rate of...

...$1000 today at an interest rate of 10% per year, how much will you have 20 years from now, assuming no withdrawals in interim?
2. a. If you invest $100 every year from the next 20 years starting one year from today and you earn interest of 10% per year, how much will you have at the end of the 20 years?
b. How much must you invest each year if you want to have $50000 at the end of the 20 years?
3. What is the present value of the following cash flows at an interest...

...InternalRate of ReturnInternalRate of Return (IRR)
Calculation of the true interest yield expected from an investment. Explanation of InternalRate of Return. What is InternalRate of Return? Definition The InternalRate of Return (IRR) is the discount rate that...

...InternalRate of Return
Meaning of Capital Budgeting
Capital budgeting can be defined as the process
of analyzing, evaluating, and deciding whether
resources should be allocated to a project or
not.
Capital budgeting addresses the issue of
strategic long-term investment decisions.
Process of capital budgeting ensure optimal
allocation of resources and helps management
work towards the goal of shareholder wealth
maximization....

...000 | -$2,000,000 |
1 | 500,000 | |
2 | 500,000 | |
3 | 500,000 | |
4 | 500,000 | |
5 | 500,000 | |
6 | 500,000 | |
7 | 500,000 | 5,650,000 |
a. Compute the NPV and IRR for the above two projects, assuming a 13% required rate of return.
b. Discuss the ranking conflict.
c. What decision should be made regarding these two projects?
Answer:
a. NPV of A = $211,305 NPV of B = $401,592.64
IRR of A = 16.33% IRR of B = 15.99%...

...H00112703
INTERNATIONAL BUSINESS MANAGEMENT
FRIDAY 08TH MARCH 2012
C38FN 2012-2013
CORPORATE FINANCIAL THEORY
WORDCOUNT: 2874
Abstract
This essay will discuss the net present value (NPV), payback period (PBP) and internalrate of return (IRR) approaches for a project evaluation. It is often said that NPV is the best approach investment appraisal, which I why I will compare the strengths and weaknesses of NPV as well as...

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