Internal Rate of Return (IRR) Method Homework Help

Internal Rate of Return (IRR) Method 

Tile second discounted cash flow ([X:F) or time-adjusted method for appraising capital internecine decisions is the internal rate of return (IRR) method. This technique is also known :IS yield 01/ investment, marginal efficiency of capital, marginal productivity
of capital, rate of ‘l’IIIn!. time-adjusted rate of return and MJ 011. Like the present value method, the IRR method also considers the time value of money by discounting the cash streams. The basis of the discount factor, however. is different in both cases. In the case of the net present value method, (he grounding rate i.~the: required rate of return and being a predetermined rate, usually the cost of capital, its determinants are external to the proposal under consideration. The IHR. on [he’ other hand, is based on facts which arc internal to the proposal. In other words, while arriving at the required rate of return for finding out present values the cash flows–inflows as well as outflows are not onside ed. But the IRR depends entirely on the initial outlay and the cash proceeds of the project which is being evaluated for acceptance or rejection. It is, therefore, appropriately referred toast internal rate of return. The internal rate of return Usually the rate of return that a project earns. It is defined as the discount rate (r) u bib equates beanbag gale present value of the net cash inflows (CFAT) with the aggregate present value of cash outflow of a project. In other words, it is that rate which gives the project’ NPV of zero, Assuming conventional cash flows, mathematically, the IRR is represented by. the rate such that

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