Internal rate of return

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:30AM in AAT student discussion
"The IRR of a project can be defined as the rate of discount which when applied to a projectâ??s<BR>cash flows results in a zero net present value. In this instance the rate is 12%. It can be used<BR>as a guide in a straight accept or reject decision. The decision rule will be to accept an<BR>investment if the IRR is greater than a pre-determined cut-off rate."<BR><BR><BR>That is an example answer on Nov 2004 ECR. Anyone care to put this in English?! ;-)<BR><BR>I fully understand NPV, but I'm struggling to come to terms with IRR. What do we need to know about it for this exam? We obviously don't need to calculate it, though it'd help if I knew how, would probably help me understand it more. I know it shows the percentage at which the investment breaks-even but is the IRR (%) also to be decided on in terms of external factors?<BR><BR>For example, if the IRR yielded say 3% it would be pointless since you could stick the cash in a bank account and get a higher rate? Speaking from the opportunity cost side of things. <BR><BR>

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Internal rate of return

    From exam point of view, there is no formula to calculate the IRR, you would be given 2 different rates to calculate the NPV, one will you a positive NPA and the other negative and expected to draw a graoh that will estimate the IRR.<BR><BR>IRR is not a form of investment appraisal and purely a way of finding the optimum rate in which you would receive positive NPV.<BR><BR>Also worth knowing that if you are borrowing cash to fund project then the borrowing rate needs to be below the IRR.

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