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匿名 發問於 商業及金融其他 - 商業及金融 · 1 十年前

Internal rate of return (IRR)

I am doing an assignment about IRR. But I have an unclear concept on this topic. Are these paragraphs consist with each other? Many thanks for your help.

The internal rate of return

does not rate what a project is worth to a company; it only determines whether

a project is beneficial as an investment. In this way, the internal rate of

return acts as an investment tool rather than a guarantee of performance. A

project could have a lower expected return but a larger increase in the

shareholder's wealth. This option should be chosen over others, even if the

initial investment is higher.

When determining the

internal rate of return, the calculations assume that re-investments of

positive cash flows will occur. If an investment does not have positive cash

flows, the project's length of investment should be considered. A company using

internal rate of return should assume that a project will require a series of

cash investments with only one cash outflow at the end. This is most common

with venture-capital and private-equity investments that are risk factors to a

firm, but may prove to be substantial sources of revenue in the future.

Conclusion: It is probably true to say that where a calculation or

valuation is dependent upon a considerable number of variables and a large

number or varying pattern of time periods, the use of discounted cash flow

techniques is more appropriate than the traditional investment valuation approach.

It is also easy to incorporate in discounted cash flow calculations estimates

to reflect the effect of inflation upon future income flows and outgoings. Likewise,

whereas traditional methods cannot easily reflect the possibility of the future

sale of the income producing asset at an enhanced value, such a calculation is

easily incorporated in discounted cash flow calculations.

1 個解答

  • ?
    Lv 7
    1 十年前

    IRR is an evaluation tool to determine whether the expected return on investment compared to the Company's own cost of capital is worth investing. As we all know, all capital has cost. That is why the second paragraph says venture capitalists and private equity investors choose high IRR with high risk factors because they have a low cost of capital.

    IRR depends on the assumption of discounted cashflow model and therefore, discount rate is a key factor in the measurement. In real life situation, it is very unlikely to be the case, as the interest rate is now being manipulated by the Governments to encourage investment and employment. There is also the possibility of trade wars between the East and the West and the instability of currencies further reduces the accuracy in cashflows.

    For reference only.