Internal Rate of Return

For Investment B: (40 – 5)/ 30= 1.16 standard units= close to 88% to get the 40 million in

IRR uses all cash flows and incorporates the time value of money. When evaluating independent projects, IRR will always lead to the same decision as NPV. Because IRR assumes that cash flows will be reinvested at the internal rate of return, which is not always or even usually the case, it can rank mutually exclusive projects incorrectly. With certain patterns of cash flows, the IRR equation has more than one solution, which confuses the decision rule. IRR is slightly more

Internal Rate of Return is a discount rate in which the net present value of an investment becomes zero. The investment should be accepted if the IRR is not less than the cost of capital. The IRR measures risk, by showing what the discounted rate would have to reach to lose all present value. Futronics Inc. investment would have an IRR of 14.79%. The investment should be accepted since it is greater than the 8% cost of capital. The 14.79% IRR shows the growth expected from the

a) Assuming the opportunity interest rate is 6%, what is the present value of the second alternative?

The difference between the MIRR and the IRR is that the IRR assumes that the cash flows are reinvested at the IRR, but the MIRR assumes the cash flows are reinvested at the firm’s cost of capital. The MIRR is better because it goes a step further and provides a clearer view of the future. The MIRR examines the reinvestment by determining what it does with the money it receives.

30) Calculate the IRR for the following investment project: initial investment is $75,000; inflows are $20,000 for the next five years; required rate of return is 15%. (Round your answer to the nearest whole percentage)

The Modified Internal Rate of Return is an underused measure for selection of projects that a company can choose because it is more effective at dealing effectively with periodic free cash flows that develop from the time that an asset is purchased through its life to the point where it is sold, ranking projects and variable rates of return through the project life. The Internal Rate of Return is an inefficient model to make decisions with because it lack the ability to account for the periodic free cash flows, proper ranking and variable returns from certain projects.

10) Investment A requires a net investment of $1,600,000. The required rate of return is 12% for the four-year annuity. What are the annual cash inflows if the net present value equals 0? (rounded)

A project may have more than one IRR, especially when returns of an investment yield negative cash flows following positive cash flows.

1. What is the appropriate required rate of return against which to evaluate the prospective IRR 's from the B ANSWER:The appropriate rate of return against which to evaluate the IRR is the risk-free rate, plus the market risk

(Compound value solving for I) at what annual rate would the following have to be investe

       One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption.

2. The reinvestment rate assumption is the assumption that for the NPV calculation you can reinvest the cash inflows at the WACC and for the IRR calculation you can reinvest the cash flows at the IRR itself. With this assumption you would think that the NPV would be more preferred because the WACC is easier to determine.

Internal rate of return (IRR) is a rate of return on an investment. The IRR of an investment is the interest rate that will give it a net present value of zero.

Internal rate of return (IRR) is the discount rate that makes NPV equal to zero. It is also called the time-adjusted rate of return.