Flashcards in Evaluation and Technique - Internal Rate of Return Deck (3):
Internal Rate of Return
Time adjusted rate of return - evaluates a project by determining discount rate that equate the PV of the project's future cash inflows with PV of cash outflows;
Directly related to the net present value method; both always result in same accept or reject outcome; Once IRR is determined, it is compared with firm's cost of capital or other measure of desired rate of return. If IRR = or is greater it would be financially acceptable
It does so by determining the present value factor implicit in the project and "backs into" the related interest or discount rate.
Calculation of IRR
Equation for NPV = 0
Future annual cash inflows x PV factor = Investment Cost