Answered: What is the development of an internal…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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What is the development of an internal rate-of-return criterion?

Expert Solution

Step 1

The metric used in capital budgeting help to assess the potential investments profit is known as IRR (internal rate of return). The IRR is a discount rate which make the NPV (net present value) of all cash flow equal to zero.

Step 2

The IRR represents the interest rate that reduces the net present value equal to zero. The project would accept when the IRR is higher than the discount rate and reject when IRR becomes lower than the discount rate.

The steps to measure the IRR can be listed as follows.

Discount the future cash flow to the present time.

Set the net present value of cash flow equal to zero by using the trial and error method

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