Irr

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oh confused one
oh confused one Registered Posts: 128 Dedicated contributor 🦉
in AAT Level 3 (Level 6 in Scotland)
Please can someone explain this to me in easy terms - I really don't get where it fits in with NPV and the more I try to readand understand it the less confident I am about the whole exam aaaaaaarrrrrrggggggghhhhhhh :confused1::confused1::confused1:

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  • Esme
    Esme Registered Posts: 711 Epic contributor 🐘
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    It is the discount rate which gives a Net Present Value of zero.

    When you add all the cash flows and discount them to find the NPV they have been discounted at a percentage and the NPV is usually positive.

    If you were to lower the disount rate the NPV will beccome zero at some point.

    The higher the IRR the better.

    Hope this helps!?
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod
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    Super Esme

    A very minor addition
    As the discount rate rises The NPV falls
    Sandy
    sandy@sandyhood.com
    www.sandyhood.com
  • Esme
    Esme Registered Posts: 711 Epic contributor 🐘
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    That was something I learnt on your revision day Sandy.. have managed to imprint it in my mind! So thanks! :)
  • oh confused one
    oh confused one Registered Posts: 128 Dedicated contributor 🦉
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    Thanks for your replies but I really just plain and simple don't understand it.

    What I have managed to deduce is the following and haven't a clue if I am right or not.

    If the NPV comes to zero (ie Capital outlay = capital income) then IRR is supposed to come into play - but how and why I am getting myself really stressed about this and all the books talk in "waffle" :thumbdown::confused1::ohmy:

    When are the resits lol
  • Esme
    Esme Registered Posts: 711 Epic contributor 🐘
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    When you calculate the NPV a discount rate is being used. It could be 10%,12%,14%....etc.

    If the NPV comes to zero, whichever discount rate has been used is the IRR.

    Companies have a cost of capital in their guidlines, like the payback period. If this cost of capital for a new investment is below the IRR then you should recommend this new investment.
  • oh confused one
    oh confused one Registered Posts: 128 Dedicated contributor 🦉
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    thanks for that finally I actually understand it phew :thumbup1:

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