Internal Rate of Return IRR (E)
What is the project? How to select and justify the project? How to plan and execute the project?
Posted: Sep 2010
The Internal Rate of Return (IRR) is the rate of compound interests at which the company’s investment is repaid by proceeds from the project over a specified period of time. It is the interest rate at which the net present value of the project is zero and is referred to as the yield of the project. The internal rate of return is compared to a minimum acceptable rate, which is referred to as a hurdle rate, to determine whether to comence with the project. If the internal rate of return for the project is greater that the hurdle rate, the project meets the financial criteria and will typically be approved.
Direct form of the internal rate of return calculation is used when the net cash flow is the same for each period. The first step is to determine a factor from which the internal rate of return can be determined.
The formula for determining the factor for determining the internal rate of return is as follows:
Factor for determining IRR = (Investment in the project) / (Net annual cash flow).
Internal Rate of Return (IRR):
This method measures the rate of profitability of the project. This method takes into account all three components of net cash inflows, time value of money, and risk, but because of several variables and assumptions, it can return unrealistic reinvestment results that cause this method to be suspect.
By using the internal rate of return method (IRR) in conjunction with NPV, the company can be assured that not only is the project worth pursuing, the project is also profitable at the rate the company is expecting. This method cannot be used alone, since it is dependent on determining the NPV before the IRR can be determined.
Continue on Project Management:
1. Project Management Overview
2. 9 Areas of Project Management
3. Project Lifecycle – 5 Stages of Project
4. How to Determinine a Value of the Project?
4.1. Simple Payback
4.2. Average Return on Investment (ROI)
4.3. Net Present Value (NPV)
4.4. Internal Rate of Return (IRR)
4.5. Cost/benefit analysis
4.6. Time value of money
4.7. Present value of future payments
4.8. Justification of Addopted project
5. Project Planning – Project Charter
6. Work Cascading Structure (WBS)
7. Project Scheduling ( Arrow-on-Arrow and Gantt Chart )
8. Project Scheduling ( CPM and PERT )
9. The Responisbility Matrix
10. Resources and Budget Planning
11. Clasification of Projects