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Essay / Research Paper Abstract
This 4 page paper describes what is meant by the internal rate of return (IRR), how it is used, its' advantages and strengths along with its' Disadvantages and weaknesses. IRR is also compared to net present value (NPV). The bibliography cites 7 sources.
Page Count:
4 pages (~225 words per page)
File: TS14_TEIntRRn.rtf
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Unformatted sample text from the term paper:
return per annum that the investment will achieve. The net present value calculation takes the future net cash flows of an investment and then discounts them into todays value. For
example, for an investment in a bond the discount rate used may be the expected inflation rate so that the value of the future investment reflects the real value of
money. The discount rate may be adjusted. For a company the rate may be the cost of capital, and if there is a high risk the discount rate may include
the risk premium. The output is a number, which is the value of the project or investment in todays terms. The IRR is calculated with two of these; a positive
and a negative figure, which are used to calculate a percentage figure that represents the annual return that the investment will create.
The IRR is also called the marginal efficiency of investment by Keynes (Anonymous, 2001). Here there is a method that allows a company to try to make comparisons between different
forms of investment (Elliott and Elliott, 2005, Watts, 1996). Even with similar investments such as bonds, there can be significant differences such as term and nominal interest rate. This is
an approach which allows for a direct comparison to be made. When an investment is made there will be an opportunity cost,
not all investments can be made. The investor is likely to want to maximise their return so that an investment has a low opportunity cost1. It is assumed that
when a company/investor has different potential projects they will try to rank these investments with reference to the internal rate of return or the marginal efficiency of the investment in
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