Irr
Kenneth Waring
Registered Posts: 8 New 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:
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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
sandy@sandyhood.com
www.sandyhood.com0 -
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%...0
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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 YESSandy
sandy@sandyhood.com
www.sandyhood.com0
