The Internal Rate of Return (IRR): The Internal Rate of Return (IRR) is a capital budgeting metric used by firms to decide whether they should make investments. It is also, called Discounted Cash Flow Rate of Return (DCFROR) or Rate of Return (ROR). It is an indicator of the efficiency or quality of an investment, as opposed to Net Present Value (NPV), which indicates value or magnitude (Bruce, 2003). IRR is the discount rate that generates a zero net present value for a series of future cash flows. This essentially means that IRR is the rate of return that makes the sum of present value of future cash flows and the final market value of a project (or an investment) equal its current market value. Internal rate of return provides a simple hurdle rate, whereby any project should be avoided if the cost of capital exceeds this rate. Usually, a financial calculator has to be used to calculate this IRR, though, it can also be mathematically calculated using the (Eq. 2):
The Internal Rate of Return (IRR): The Internal Rate of Return (IRR) is a capital budgeting metric used by firms to decide whether they should make investments. It is also, called Discounted Cash Flow Rate of Return (DCFROR) or Rate of Return (ROR). It is an indicator of the efficiency or quality of an investment, as opposed to Net Present Value (NPV), which indicates value or magnitude (Bruce, 2003). IRR is the discount rate that generates a zero net present value for a series of future cash flows. This essentially means that IRR is the rate of return that makes the sum of present value of future cash flows and the final market value of a project (or an investment) equal its current market value. Internal rate of return provides a simple hurdle rate, whereby any project should be avoided if the cost of capital exceeds this rate. Usually, a financial calculator has to be used to calculate this IRR, though, it can also be mathematically calculated using the (Eq. 2):
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