Internal Rate of Return (IRR)
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| − | '''Internal rate of return''' ('''IRR''') is a parameter used in the [[Wikipedia:financial analysis|financial analysis]] to determine the profitability of the investment, in other words, it estimates the rate of return that the evaluated investment could have. The term "internal" is due to the fact that for the calculation of the IRR, external factors that could affect the profitability of the project, such as inflation, are not considered. | + | '''Internal rate of return''' ('''IRR''') is a parameter used in the [[Wikipedia:financial analysis|financial analysis]] to determine the profitability of the [[Wikipedia:investment|investment]], in other words, it estimates the rate of return that the evaluated investment could have. The term "internal" is due to the fact that for the calculation of the IRR, external factors that could affect the profitability of the project, such as inflation, are not considered. |
In mathematical terms, the IRR is defined as the discount rate that causes the sum of the cash flows of the project to be zero. In other words, if the [[Wikipedia:net present value|net present value]] (NPV) of a project is 0 at a certain rate, that rate is the IRR <ref name ="Patrick2016"/>. | In mathematical terms, the IRR is defined as the discount rate that causes the sum of the cash flows of the project to be zero. In other words, if the [[Wikipedia:net present value|net present value]] (NPV) of a project is 0 at a certain rate, that rate is the IRR <ref name ="Patrick2016"/>. | ||
Researchers in 2003<ref name ="Tang2003"/> have validated the IRR as an alternative to the NPV as an indicator for project evaluation, considering that the IRR as from the point of view of the investor and the NPV from the point of view of the society. | Researchers in 2003<ref name ="Tang2003"/> have validated the IRR as an alternative to the NPV as an indicator for project evaluation, considering that the IRR as from the point of view of the investor and the NPV from the point of view of the society. | ||
Revision as of 15:44, 11 February 2022
Developed by Pablo Leandro Capellari- s213666
Internal rate of return (IRR) is a parameter used in the financial analysis to determine the profitability of the investment, in other words, it estimates the rate of return that the evaluated investment could have. The term "internal" is due to the fact that for the calculation of the IRR, external factors that could affect the profitability of the project, such as inflation, are not considered. In mathematical terms, the IRR is defined as the discount rate that causes the sum of the cash flows of the project to be zero. In other words, if the net present value (NPV) of a project is 0 at a certain rate, that rate is the IRR [1]. Researchers in 2003[2] have validated the IRR as an alternative to the NPV as an indicator for project evaluation, considering that the IRR as from the point of view of the investor and the NPV from the point of view of the society.
Contents |
Big idea
Describe the tool, concept or theory and explain its purpose. The section should reflect the current state of the art on the topic
Application
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Limitations
Critically reflect on the tool/concept/theory. When possible, substantiate your claims with literature
Annotated Bibliography
- ↑ Patrick, Michael, and Nick French. «The internal rate of return (IRR): projections, benchmarks and pitfalls». Journal of Property Investment & Finance, vol. 34, no. 6, January 2016, p. 664-69. Emerald Insight, https://doi.org/10.1108/JPIF-07-2016-0059.
- ↑ Tang, S.L., and H. John Tang. «TECHNICAL NOTE: THE VARIABLE FINANCIAL INDICATOR IRR AND THE CONSTANT ECONOMIC INDICATOR NPV». The Engineering Economist, Vol. 48, no. 1, January 2003, p. 69-78. DOI.org (Crossref), https://doi.org/10.1080/00137910308965052.
