Internal rate of return
(IRR)
Discount rate that
makes PV of cash
inflows equal PV of
cash outflows
For uniform cash
inflows—solving
for i in the following
equation: PV annuity
factor for i
Annual
after-tax cash inflow
Initial investment
1. Considers time
value of money
2. Focuses on after-tax
cash flows
3. Ratios are intuitively
appealing to
managers
1. Inherent assumption
regarding reinvestment
rate could be
unrealistic
2.
Complex
to compute
if
done manually
3.
May
not lead to
optimum
capital
budget