The Internal Rate of Return
According to Berk & DeMarzo (2016), the internal rate of return abbreviated as IRR and also known as the yield on investment refers to the discount rate that equates the NPV (net present value) of the proposed investment to zero (0). That is, the future cash flows of the investment plan equal the initial capital outlay of the project. The technique analyzes an investment plan by comparing the yield on investment to the minimum hurdle rate of a company. Like the NPV method, internal rate of return also puts into consideration the time value of money, where it discounts the future inflows. The procedure relies on the initial cost of the capital that the firm may incur when undertaking a project and the cash proceeds to come up with a reliable and informed decision (accept or reject) concerning the investment plan.
When an organization computes and get the IRR for one investment program, it also calculates the IRRs for other proposals for comparison to identify the most valuable option to invest on (Berk & DeMarzo, 2016). Furthermore, an organization needs to compare the IRR of an investment to the average weighted cost of capital (minimum required …show more content…
One of the advantages is that IRR considers the time value of gains/money (Berk & DeMarzo, 2016). That is, the IRR method takes into accounts the entire inflows that a given project generates throughout its forecasted lifespan, hence, considering the discounted value of money. Again, among other procedure such as payback period, net present value, and the rest, IRR is preferable in real life setting as it evaluates the profitability of the investment in the form of a percentage, which makes it comparable with the outlined weighted average cost of capital for the enterprise. Finally, the method aligns with the primary objective of the shareholders, which is wealth maximization by acquiring the highest
According to Berk & DeMarzo (2016), the internal rate of return abbreviated as IRR and also known as the yield on investment refers to the discount rate that equates the NPV (net present value) of the proposed investment to zero (0). That is, the future cash flows of the investment plan equal the initial capital outlay of the project. The technique analyzes an investment plan by comparing the yield on investment to the minimum hurdle rate of a company. Like the NPV method, internal rate of return also puts into consideration the time value of money, where it discounts the future inflows. The procedure relies on the initial cost of the capital that the firm may incur when undertaking a project and the cash proceeds to come up with a reliable and informed decision (accept or reject) concerning the investment plan.
When an organization computes and get the IRR for one investment program, it also calculates the IRRs for other proposals for comparison to identify the most valuable option to invest on (Berk & DeMarzo, 2016). Furthermore, an organization needs to compare the IRR of an investment to the average weighted cost of capital (minimum required …show more content…
One of the advantages is that IRR considers the time value of gains/money (Berk & DeMarzo, 2016). That is, the IRR method takes into accounts the entire inflows that a given project generates throughout its forecasted lifespan, hence, considering the discounted value of money. Again, among other procedure such as payback period, net present value, and the rest, IRR is preferable in real life setting as it evaluates the profitability of the investment in the form of a percentage, which makes it comparable with the outlined weighted average cost of capital for the enterprise. Finally, the method aligns with the primary objective of the shareholders, which is wealth maximization by acquiring the highest