Fundamentals of Investment Appraisal (De Gruyter Studium) by Röhrich Martina

Author:Röhrich, Martina [Röhrich, Martina]
Language: eng
Format: epub
Publisher: De Gruyter
Published: 2014-09-08T16:00:00+00:00

3.5.4 Evaluation of the Internal Rate of Return Method

– The internal rate of return is the discount rate that makes the estimated net present value of an investment equal to zero. The decision rule is to accept a project if its internal rate of return exceeds the predetermined required return.

– The internal rate of return method is easy and understandable whereas the net present value is difficult to approach and to communicate and its method of evaluating investment projects is through the use of a user-friendly percentage rate of return which management is familiar with.

– The implied assumption that any amount of money can be reinvested at the project’s internal rate of return is problematic. This assumption is unrealistic and thus less reasonable than the implied assumption of the net present value method that money can be borrowed and reinvested at the discount rate.

– If the internal rate of return and the net present value give different measures of relative desirability, the net present value approach is superior. The net present value will give correct results if used properly.

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