Internal Rate of Return(IRR)

which
" The internal rate of return is that rate
equates the present value of cash inflows with
the present value of cash outflows of an
investment project

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 Return (IRR)
Internal Rate of

estimate ofIRR:
Steps for Refined return
closest rates of
1.Determine NPV of 2
absolute values from (1)
2. Find the sum of

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129
 Return (RR)
InternalRate of
estimate ofIRR:
Steps for Refined return
closest rates of
Determine NPV of2
1. values from (1)
sum of absolute
2.Find the discount rate
Calculate ratio of smaller
3. rate
smaller discount
4.Add this tothe

129
MBAIE302C
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 Internal Rate of Return (IRR)
The internal rate of return is that rate which
equatesthe present value of cash inflows with
the present value of cash outflows of an
investment project
" Investment =X 1 r =IRR (trial & error)
Decision Rule:
- Accept, if IRR is greater than cost of capital
- Reject. If IRRis less than cost of capital

MBAIE302C
 Benefit-Cost Ratio or ProfitabilityIndex
Two ways of defining relationship between benefits and
cOsts:
PVB
- Benefit-cost ratio: BCR =
PVB-I
- Net Benefit-cost ratio: NBCR = = BCR-1

PVB= Present Value of Benefits

|= Initial investment
" Decision Rules:
BCR NBCR Rule
>1 >0 Accept
=1 =0 Indifferent
<1 <0 Reject
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 Payback Period
Popular
Length of time required torecover initialcash
outlay
" Shorter the payback period, more desirable the
project

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 Return
Accounting Rate of
" Several measures:
Initial Investment
after tax/
- Avg. income Investment
after tax/ Avg.
-Avg.income
after tax but before int./ Initial
- Avg. income
Investment
- And Soon..

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