Internal Rate of Return Method Of Capital Budgeting And Evaluation:
Internal rate of return is time adjusted technique and covers the disadvantages of the traditional techniques. In other words it is a rate at which discount cash flows to zero.
It is expected by the following ratio:
Internal Rate of Return = Cash inflow / Initial Investment
Steps to be followed:
Step1. Find out factor
Factor is calculated as follows:
F= Cash outlay (or) initial investment / Cash inflow
Step 2. Find out positive net present value
Step 3. Find out negative net present value
Step 4. Find out formula net present value
Formula For Internal Rate of Return Method Of Capital Budgeting And Evaluation:
IRR = Base factor + (Positive net present value / Difference in positive and Negative net present value) x DP
Base factor = Positive discount rate
DP = Difference in percentage
Merits Of Internal Rate of Return Method Of Capital Budgeting And Evaluation:
1. It consider the time value of money.
2. It takes into account the total cash inflow and outflow.
3. It does not use the concept of the required rate of return.
4. It gives the approximate/nearest rate of return.
Demerits Of Internal Rate of Return Method Of Capital Budgeting And Evaluation:
1. It involves complicated computational method.
2. It produces multiple rates which may be confusing for taking decisions.
3. It is assume that all intermediate cash flows are reinvested at the internal rate of return.
Accept/Reject criteria For Internal Rate of Return Method Of Capital Budgeting And Evaluation:
If the present value of the sum total of the compounded reinvested cash flows is greater than the present value of the outflows, the proposed project is accepted. If not it would be rejected.
Excess Present Value Index
Excess present value is calculated on basis of net present value. It gives the results in percentage.
Internal rate of return is time adjusted technique and covers the disadvantages of the traditional techniques. In other words it is a rate at which discount cash flows to zero.
It is expected by the following ratio:
Internal Rate of Return = Cash inflow / Initial Investment
Steps to be followed:
Step1. Find out factor
Factor is calculated as follows:
F= Cash outlay (or) initial investment / Cash inflow
Step 2. Find out positive net present value
Step 3. Find out negative net present value
Step 4. Find out formula net present value
[Post Image Courtesy of Stuart Miles at FreeDigitalPhotos.net]
Formula For Internal Rate of Return Method Of Capital Budgeting And Evaluation:
IRR = Base factor + (Positive net present value / Difference in positive and Negative net present value) x DP
Base factor = Positive discount rate
DP = Difference in percentage
Merits Of Internal Rate of Return Method Of Capital Budgeting And Evaluation:
1. It consider the time value of money.
2. It takes into account the total cash inflow and outflow.
3. It does not use the concept of the required rate of return.
4. It gives the approximate/nearest rate of return.
Demerits Of Internal Rate of Return Method Of Capital Budgeting And Evaluation:
1. It involves complicated computational method.
2. It produces multiple rates which may be confusing for taking decisions.
3. It is assume that all intermediate cash flows are reinvested at the internal rate of return.
Accept/Reject criteria For Internal Rate of Return Method Of Capital Budgeting And Evaluation:
If the present value of the sum total of the compounded reinvested cash flows is greater than the present value of the outflows, the proposed project is accepted. If not it would be rejected.
Excess Present Value Index
Excess present value is calculated on basis of net present value. It gives the results in percentage.
Internal Rate of Return Method Of Capital Budgeting And Evaluation
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Friday, May 19, 2017
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