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Internal Rate of Return
Posted by Ms. Rahmi
on
08.57
in
Engineering Economy
The interal rate of return ( IIR ) is one of the most widely used capital budgeting techniques. The Internal rate of return ( IRR ) is the discount rate that equates the NPV of an investment opportunity with $0 ( because the present value of cash inflows equals the initial investment ). It is the rate of return that the firm will earn if it invest in the project and receives the gives cash inflows. Mathematically, the IRR is the value of r in Equation NPV to equal $0.
tanDecision Criteria
When IRR is used to make accept-reject decisions, the decision criteria are as follows :
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| Formula to determine IRR |
When IRR is used to make accept-reject decisions, the decision criteria are as follows :
- If the IRR is greater than the cost of capital, accept the project.
- If the IRR is less than the cost of capital, reject the project.
these criteria guarantee that the firm will earn at least its required return. such an outcome should increase the market value of the firm and therefore the wealth of its owner.
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