Irr

Kenneth Waring
Kenneth Waring Registered Posts: 8 Regular contributor ⭐ ? ⭐
Help, having problems with understanding Internal Rate of Return... I get that the this is the discount rate that gives an NPV of 0...what i don't understand is when a company should recommed a project on basis of the IRR???:001_unsure:

Comments

  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    A company will have a discount rate it applies when assessing the viability of projects. This is sometimes called the hurdle rate. If a project has an IRR that is more than the required rate the project should be recommended.

    It is a bit like a cabbie setting up in business, he can borrow at 8% to get started and has worked out that his business will return an internal rate of return of 15%.
    So his return rate is greater than the cost (rate) of the capital needed.
    Sandy
    [email protected]
    www.sandyhood.com
  • Kenneth Waring
    Kenneth Waring Registered Posts: 8 Regular contributor ⭐ ? ⭐
    Hi, thanks for the input... just to finally clarify this and get it into my head... When you say his rate of return is greater you mean that the 8% is greater than the IRR of 15%...
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    His return is 15% (The IRR)
    The cost of his capital was 8% (also called PV rate or discount rate)

    So he was getting 7% more than it cost him

    The IRR must be more than the PV rate for a YES
    Sandy
    [email protected]
    www.sandyhood.com
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