Internal Rate of Return (IRR) :

This rate attempts to find the earnings rate, which equates the current value of the streams of earnings to the investment outlay. IRR is described as the rate of return, which discounts all the future cash inflows to exactly equal the outlay.

Accept-Reject Rule:

The project with IRR higher than the cutoff rate will be accepted.  if not, it will be rejected.  The management will be indifferent if the IRR = cut-off rate.

Advantages:

• It is useful and has several positive points
• It assists the management in selecting the most profitable project
• It understands the time value of money

Disadvantages:

• It is difficult to calculate by trial and error method.
• under definite conditions it becomes so difficult to take any decisions such as under conditions of unbalanced cash flows, IRR may give 2 or more answers.
• It does not offer weight age of the volume of funds committed in the project.
• It imagines that the funds received at the end of each year can be invested at the similar rate of return.

Posted Date: 10/15/2012 9:25:12 AM | Location : United States

Ask an Expert

Related Discussions:- Internal rate of return (irr), Assignment Help, Ask Question on Internal rate of return (irr), Get Answer, Expert's Help, Internal rate of return (irr) Discussions

Write discussion on Internal rate of return (irr)
Your posts are moderated

Write your message here..

Related Questions

Role of financial intermediaries in the financial system, Role of Financial... Role of Financial Intermediaries in the financial system: Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor

Research and development and marketing costs, a) Product orientated busines... a) Product orientated businesses tend to be produce products and inward looking that they hope will sell in the marketplace. For example, Sony hoped that its $101,500 audio systems

Calculate amount of first coupon payment your organization, Your firm has p... Your firm has presently issued five year floating-rate notes indexed to six-month U.S. dollar LIBOR plus 1/4%.  What is the amount of first coupon payment your organization will pa

Outline the objectives of alm, You are a member of the ALM Committee (ALCO)... You are a member of the ALM Committee (ALCO) of ANZ Bank. A visiting member has some queries relating to the general framework of the ALM and interest rate risk impact on the incom

Time value of money, Can you help me out on the Time value of money????? ... Can you help me out on the Time value of money????? I need urgent help on this topic...

Is depreciation the loss of value of fixed assets, Is depreciation the loss... Is depreciation the loss of value of fixed assets No. An operative (and not a pseudo-philosophical) explanation of depreciation might be: it is a number that allows us to save

Bootstrapping, In bootstrapping method, on-the-run treasury issues ar... In bootstrapping method, on-the-run treasury issues are used as they are fairly priced, and there is no credit risk or liquidity risk involved. In practice observed yie

Emba semster solved IIBM,

Evaluate income statement and balance statement, This task must be complete... This task must be completed in order from 1 to 11 as identified in both the Income Statement and the Balance Sheet. In addition, all answers must cite relevant supporting formulas

Active management in practice, Constant Duration To ... Constant Duration To improve a buy and hold strategy a constant average duration is imposed for the managed portfolio during the full interest rate cy