Unit 6 - IRR

sarahuk3

Hi guys,

I am having difficulty understanding IRR, i believe this is when the capital cost breaks even, as a %. But what does this actually mean!?!
Say a company requires a 10% return but the IRR is 20%? is this good or bad?

Thank you
Sarah

SandyHood

Say a company requires a 10% return but the IRR is 20%? is this good or bad?

Good

sarahuk3

Why is this good!?
What does IRR mean or help towards making a decision?

SandyHood

It means that you can discount future cash flows at 20% per year and when all are added up together they will give you a nil answer.
Imagine you were borrowing money at 20% interest per year. This project would generate enough profit to pay off the loan an all the interest at the end of the term of the loan.

So if you borrowed money at 10% and were earning enough to pay off a loan at 20%, then you'd have money over that which you need.

This makes the project well worth the investment.