INTRODUCING THE INTERNAL RATE OF RETURN (IRR)

The Internal Rate of Return (IRR) is that discount rate providing a net value of zero for a future series of cash flows. The IRR and Net Present Value (NPV) are used to decide between investments to select what investment should provide the most returns. DIFFERENCE BETWEEN THE NPV AND IRR

The main difference is that the Net Present Value or Net Present Value (NPV) is used as actual amounts, while the IRR is the interest yield as a percentage expected from an investment.

When using the IRR, one generally selects the projects whose IRR is greater than the cost of capital. However, selecting the Internal Rate of Return as opposed to the Net Present Value means that if investors focus on maximizing IRR instead of NPV, there is a risk in picking a company with a return on investment bigger than the Weighted Average Cost of Capital (WACC) but less than the present return on existing assets.

IRR represent the actual annual return investment only when the project generates 0 interim cash flows - or if those investments can be invested at the current IRR.

So the goal should not be to maximize the Net Present Value (NPV).

However, this article aims to present the limitations and benefits of using the Internal Rate of Return (IRR).

Net Present Value (NPV)

The net present value of a project depends very closely the discount rate used. So when it comes time to compare two projects, the choice of discount rate, which is often based on

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