#5 Internal Rate of Return (IRR) - Investment Decision - Financial Management ~ B.COM / CMA / CA
Saheb Academy・2 minutes read
Saheb Academy's investment decision series covers the internal rate of return technique in capital budgeting, highlighting the importance of understanding net present value. Internal rate of return is calculated by comparing it to the required rate of return to determine project acceptance or rejection.
Insights
- Understanding the net present value is essential before engaging with internal rate of return calculations, as it serves as a foundational concept for evaluating investment decisions.
- Internal rate of return (IRR) is a critical metric that determines the rate at which the Net Present Value (NPV) of an investment becomes zero, indicating the breakeven point and guiding acceptance or rejection based on comparison with the required rate of return.
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Recent questions
What does the internal rate of return represent?
The internal rate of return (IRR) is a percentage that signifies the rate at which the net present value (NPV) of an investment becomes zero.
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Summary
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"IRR Calculation: Key to Investment Decisions"
- Saheb Academy provides videos on investment decisions, urging viewers to subscribe and follow on Instagram for updates.
- The fifth video in the investment decision series covers the internal rate of return technique in capital budgeting.
- Understanding the net present value is crucial before delving into internal rate of return calculations.
- Internal rate of return is a percentage representing the rate at which the NPV of an investment becomes zero.
- The IRR is compared to the required rate of return; if higher, the project is accepted, if lower, it's rejected.
- The IRR signifies the rate at which the NPV equals zero, indicating a breakeven point.
- Calculation of IRR involves trial and error method, interpolating between two NPVs at different discount rates.
- The formula for IRR interpolation is IRR = Lower Rate + (NPV at Lower Rate / (NPV at Lower Rate - NPV at Higher Rate) * (Higher Rate - Lower Rate)).
- To calculate IRR, one NPV must be positive and the other negative, allowing for interpolation to find the rate at which NPV is zero.
- A practical example of calculating IRR involves an investment of Rs. 1,36,000 with projected cash inflows over five years, using discount rates to determine the IRR.
