Internal Rate of Return help

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi,

Can anyone help? I dont understand the internal rate of return, or why it would be used. Or even how to use it!! I understand it has something to do with the capital and getting down to a point where it is zero balance, but thats about it! What is the point of it and why would I use it? The books have about 5 lines on this topic yet it has come up in simulations / exams.

Cheers...

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Internal Rate of Return help

    The point of IRR is as a way of judging whether it is worth while to invest in a project.

    Companies often have what they call "hurdle rates", these are the targets. If you come up with a new idea for a project and then go away and work out the IRR the boss will then say yes or no to it going ahead. The chances are that if the company has a 12% hurdle rate and your project will produce an IRR of 18% then the boss will say yes.

    Why do companies use it?

    A good question Zoe. I often think that boards of directors are a little uncomfortable with NPV values, but feel more at home with %s. They can understand that one % is bigger than another.

    Have I answered the question?

    sandy.hood@chichester.ac.uk
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Internal Rate of Return help

    I Had the same problem trying to understand it but on looking through past AAT Magazines I found some help in the study zone you can access it on line through the site the page is

    http://www.accountingtechnician.co.uk/atonline/study_zone/display/store690/item8346/

    This shows you help to work it out so your have a better understanding of what it's about


    LYn

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