Ocean Carrier

The team also chose to calculate IRR as another method of evaluating the Super Project. Again

IRR uses all cash flows and incorporates the time value of money. When evaluating independent projects, IRR will always lead to the same decision as NPV. Because IRR assumes that cash flows will be reinvested at the internal rate of return, which is not always or even usually the case, it can rank mutually exclusive projects incorrectly. With certain patterns of cash flows, the IRR equation has more than one solution, which confuses the decision rule. IRR is slightly more

30) Calculate the IRR for the following investment project: initial investment is $75,000; inflows are $20,000 for the next five years; required rate of return is 15%. (Round your answer to the nearest whole percentage)

d. internal rate of return (IRR) the discount rate that forces a project’s NPV to equal zero. The project should be accepted if the IRR is greater than the cost of capital.

The reason is that the NPV of U.S. company for the 15-year project is $-8,180,953.79(US15) and the NPV value of Hong Kong company is $-403,998.93(HK15). In both circumstances, the company would lose money by selling it at 15 years.

A project may have more than one IRR, especially when returns of an investment yield negative cash flows following positive cash flows.

It is identified that internal rate of return is relatively a rate at which the value of net present value tends to be zero. The internal rate of return is an appraisal that is mainly associated with a hurdle cost of either capital or discount rate against which it is compared. The hurdle cost mainly corresponds to the advantage cost of capital. In reference to public projects, the hurdle rate represents to be TDR. The major advantage behind making use of this financial appraisal system is the aspect that internal rate of return is mainly dependent on the percentage of rate of return as well as cash flow in order to effectively access a specific investment with the identification of the time value of money over the life of proposed project and it significantly analysis the risks as well as constraints that are associated with the implication of the project (Götze, Northcott, & Schuster, 2007). In the similar way, when discount rate represents to be anonymous, it is not substantial to make use of internal rate of return in determining whether or not to implement the project, even it is a fact that for IRR estimation which is observed as merit. Along with benefits there are number of disadvantages as well that are linked with IRR appraisal technique. It is not highly suitable for the purpose of ranking of different competitive projects. It is relatively possible that internal rate of return of two competing projects are similar but referred to have distinguishing values of NPV due to distinction in the timing of costs as well as advantages (Haka,

The payback method and the unadjusted rate of return are methods that overlook the time value of money but are quick and easy to calculate but prove to be less accurate. These types of methods are typically used for small investment. The payback method itself shows how long it will take the company to recover the initial investment cost. When using the payback method, it is recommended to apply for a shorter payback period. The formula for computing the payback period is as follows:

The unmodified IRR method, as compared with the NPV method, will not show the superiority of any two mutually exclusive investments with two different initial outlays. In such a case, an investment with lower IRR could have a higher NPV and therefore should be chosen by an investor. In some cases where there are streams of positive and negative cash flows in an investment, the IRR method may yield more than one IRR. This is not a disadvantage if the calculations are performed correctly.

The IRR technique use the accept/reject criteria of comparing the IRR with the cost of capital which is based on comparing the internal rate of return to the cost of the capital of the project.

IRR, like NPV, takes the in to account the time value of money. This means that the first year cash flows are greater in value than the second year and so on for the economic life of a project. The second strength is that the “hurtle rate” can be based on market returns of similar projects. The last is that since it is a “rate of return”, it is more understandable to non-financial managers than NPV.

Internal Rate of Return is the discount rate that NPV become zero. It will accept the project that has a greater discount rate compare to IRR. It is usually used because it is easy for manager to find out the rate of return. But it is no accurate when the project have some non-normal cash flow or when evaluating mutually exclusive projects.

IRR is one of the techniques (Lock, 2004). IRR is the rate at which the present value of the future cash flow will be equal to the initial cash flow and the NPV of the project will be zero. A project will be accepted if the cost of capital is lower than the IRR. Otherwise the project will be rejected. IRR provides many benefits. It helps to compare the cost of capital with the rate of return that will be earned on the project. It discounts the future cash flow and give correct decision in most of the cases (Daft, 1997).

for calculating IRR we create one assumption. We think that if we invest out money on this IRR, after receiving profit, we can easily reinvest our investments profit on same IRR. It is an unrealistic assumption.

It assumes that project cash flows are reinvested at the company's required rate of return.