Internal rate of return (IRR)

[Lorenzo Incarnato]

Abstract: (13/02)

The Internal Rate of Return (IRR) is a key component of capital budgeting and corporate finance to estimate the profitability of potential investments. Organizations usually calculate the Internal Rate of Return to decide among multiple investments alternatives () It is defined as the discount rate (%) that makes the Net Present Value equal to zero in a discounted cash flow analysis. One of the most important jobs in any company management team is deciding which project to fund and which project to ignore. The IRR is one of the most popular methods of evaluating potential projects. The formula delivers a single discount rate that only depends on the cash flow of the project, and does not depend on the market interest rates as in the case of the calculation of the NPV, and this is the reason why it is called Internal Rate of Return.

Definition and Formula of the Internal Rate of Return $0 = NPV$

- The function of an abstract is to describe, not to evaluate or defend, the paper.

- The abstract should begin with a brief but precise statement of the problem or issue, followed by a description of the research method and design, the major findings, and the conclusions reached.

- The abstract should contain the most important key words referring to method and content: these facilitate access to the abstract by computer search and enable a reader to decide whether to read the entire dissertation.

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:

provide guidance on how to use the tool, concept or theory and when it is applicable (IRR in practice)

Limitations:

critically reflect on the tool/concept/theory and its application context. What can it do, what can it not do? Under what circumstances should it be used, and when not? How does it compare to the “status quo” of the standards – is it part of it, or does it extent them? Discuss your article in the context of key readings / resources provided in class. Substantiate your claims with literature

Annotated bibliography:

Provide key references (3-10), where a reader can find additional information on the subject. The article MUST make appropriate references to the and reference material provided in class – either incorporating it as a source, or critically discussing aspects that are missing from it but covered by this article. Summarize and outline the relevance of each reference to the topic (around 100 words per reference). The bibliography is not counted in the suggested 3000 word target length of the article.