Internal Rate of Return (IRR)
Written by Pablo Leandro Capellari- s213666
Contents |
Abstract
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.
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
Limitations
- critically reflect on the tool/concept/theory. When
possible, substantiate your claims with literature
Annotated Bibliography
Provide key references (3 10), where a reader can find additional information on the subject.
Reference Example: The book-1.[3] The book-2.[4] The book-3.[5] The book-4.[6] The book-5.[7]
References
- ↑ 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.
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