Internal rate of return (irr), Financial Management

Assignment Help:

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.

Related Discussions:- Internal rate of return (irr)

Cost of Capital, The Nu-Nu Brothers Inc. (NNBI) has the following capital s...

The Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equity 60% NNBI''s expected net income t

Calculate annual payments into a savings account, Calculate annual payments...

Calculate annual payments into a savings account: Mr. Jones intends to retire in 20 years at the age of 65. As, yet he has not provided for retirement income, and he wants to

Eps, a. Calculate expected earnings per share (EPS) if the firm is perfectl...

a. Calculate expected earnings per share (EPS) if the firm is perfectly hedged. EPS $

Define the basic motivations for a counterparty, Define the basic motivatio...

Define the basic motivations for a counterparty to enter into a currency swap.  Answer:  One major reason for a counterparty to enter into a currency swap is to exploit the comp

Purchasing power parity achieved by us and canadian dollor, Under what circ...

Under what circumstance would the U.S. dollar and the Canadian dollar be said to have achieved purchasing power parity? The U.S. dollar and the Canadian dollar possible conside

Option-adjusted spread (oas), Option-Adjusted Spread (OAS) The prime ob...

Option-Adjusted Spread (OAS) The prime objective of an investor is to buy securities which have values greater than their market prices. The discussion made on the above valuat

The mechanism of a swap in risk management, QUESTION i) Discuss the ris...

QUESTION i) Discuss the risk associated with changes in exchange rates. ii) How can these risks be managed internally? iii) Explain how a manager can use a forward contra

Explain about types of costs, Q. Explain about Types of costs? Thus two...

Q. Explain about Types of costs? Thus two types of costs are involved in keeping cash balance in a business- (i) Opportunity Cost (ii) Transaction Cost When cash balan

Define interbank currency trading worldwide use us dollar, Why does most in...

Why does most interbank currency trading worldwide involve the U.S. dollar? Answer:  Trading in currencies worldwide is in opposition to a common currency which has international

Rate of the growth of the business, Q. Rate of the growth of the business? ...

Q. Rate of the growth of the business? The working capital requirement of the a concern increase with the growth and expansion of the business activity although it is difficu

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd