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This 3-page paper provides an overview of the internal rate of return (IRR), how it's used, and its disadvantages. Bibliography lists 3 sources.
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3 pages (~225 words per page)
File: AS43_MTirrquest.doc
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corporations (to make money for the owners). To determine what future projects might yield the greatest amount of money, chief financial officers and their staffs will sometimes employ the Internal
Rate of Return, or IRR as a capital budgeting method. The IRR measures the discount rate (also known as interest rate) of capital
budgeting which, in turn, puts the net present value of cash flows from a specific project equal to zero (Internal Rate of Return-IRR, 2010). The IRR, basically, is the discount
rate that equates the present value of a projects inflows to the present value of its costs (or outflows) (Gapenski, 1989). The higher a projects IRR, the better it would
be to undertake the project (Internal Rate of Return-IRR, 2010). Relying on IRR for net present value is also known as the discounted cash flow method of financial analysis (Grayson,
2010). IRR is typically used as a ranking tool, in other words, an organization will use it to compare potential projects - those
with higher internal rates of return, the more likely theyll be used. Corporations use this tool to compare capital projects - a project producing an IRR that is higher than
the companys cost of capital (and that has an IRR higher then other projects) will be looked on more favorably (Grayson, 2010). IRR
is also used when a corporation is contemplating a stock buyback program (Grayson, 2010). A company dedicating funds to buying back stock needs to know if that stock is a
better investment than other uses of the funds for other capital projects (Grayson, 2010). In fact, IRR is very useful for a
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