Sunday, January 24, 2010


Internal Rate of Return (IRR)

The internal rate of return (IRR) is the rate that equates the investment outlay with the present value of cash inflow received after one period. This also implied that the rate of return is the discount rate which makes net present value (NPV) =0. There is no satisfactory way of defining the true rate of return of a long term asset. Internal rate of return (IRR) is the best available concept. We shall see that although it is very frequently used concept in finance, yet at times it can be a misleading measure of investment worth.

The internal rate of return (IRR) method is another discounted cash flow method for investment appraisal, which takes account of the magnitude and timing of cash flows. Other terms used to describe the internal rate of return (IRR) method are yield on an investment, marginally efficiency of capital, rate of return over cost, time adjusted rate of internal return and so on.

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