what is the internal rate of return on an investment what ar

Solution

INTERNAL RATE OF RETURN IS RETURN WHICH MAKES PV OF ALL CASH INFLOWS EQUAL TO INITIAL INVESTMENT

THAT IS NPV = 0

NPV = 0 = PV OF ALL CASH INFLOWS - INITIAL INVESTMENT

OR

PV OF ALL CASH INFLOWS = INITIAL INVESTMENT

ACCEPTANCE CRITERIA

IF IRR > REQUIRED RATE OF RETURN, WE SHOULD ACCEPT THE PROJECT

WHEN WE CONSIDER MUTUALLY EXCLUSIVE PROEJCTS, SELECT THE PROJECT WITH HIGHER IRR

WHEN WE CONSIDER INDEPENDENT PROJECTS, SELECT ALL THE PROJECTS WHICH HAVE IRR > REQUIRED RATE OF RETURN

IRR FAILS WHEN WE HAVE NON-COVENTIONAL CASH FLOWS, THAT IS MORE THAN ONE CASH OUTFLOWS. BECAUSE IN THAT CASE, WE HAVE MORE THAN ONE IRR AND IT IS DIFFICULT TO DETERMINE WHICH ONE TO ACCEPT.

IRR ASSUMES THAT ALL CASH FLOWS ARE REINVESTED AT IRR RATE