This website uses cookies to ensure you have the best experience. Learn more

Internal Rate Of Return Essay

682 words - 3 pages

Lecture No. 25 Chapter 7 Contemporary Engineering Economics Copyright © 2010

Contemporary Engineering Economics, 5th edition, © 2010

Net Investment Test
 What it is: A process to determine whether or not a firm

borrows money from a project during the investment period.  How to test: A project is said to be a net investment when the project balances computed at the project’s i* values, PB(i*)n, are either less than or equal to zero throughout the life of the investment.  Meaning: The investment is net in the sense that the firm does not overdraw on its return in any point and hence is not indebted to the project
Contemporary Engineering Economics, 5th edition, © 2010

Pure ...view middle of the document...

7

Project:
 If IRR > MARR, accept the

project.  If IRR = MARR, remain indifferent.  If IRR < MARR, reject the project.

 Decision Criterion for Mutually

Exclusive Projects:
 Use the incremental analysis

(See Lecture No. 26)

Contemporary Engineering Economics, 5th edition, © 2010

Decision Rule for Mixed Investments
 Need for an external interest rate for mixed investments. We will use the MARR as established external interest rate—the rate earned by money

invested outside of the project.  Calculate a rate of return on the portion of capital that remains invested internally—commonly known as the return on invested capital (RIC)  Select the investment if RIC > MARR.

Contemporary Engineering Economics, 5th edition, © 2010

Procedure to Calculate the RIC

Contemporary Engineering Economics, 5th edition, © 2010

Computational Logic for RIC

Borrowing from project

Lending to project

Contemporary Engineering Economics, 5th edition, © 2010

Example 7.8 RIC for a Mixed Investment

$260 $168 $100   0 2 (1  i*) (1  i*)
* * i1  20% and i2  40%

A...

Other Papers Like Internal Rate Of Return

Term Essay

964 words - 4 pages whereby a future value decreases at a compound interest rate over time to reach a present value i. Bank offers to pay you $1000 at the end of one yr in return for using $1000 of your money now ii. Present value = future value x [(1 / (1 / (1 + Interest rate)] x 1/1(1/1_interest rate)]] Chapter 10 Bonds and Stocks Characteristics and Valuation 1. Describe the relationship between internal and external financing in meeting

Acoounting Policy Essay

2271 words - 10 pages applied namely: net present value (NPV - the main approach in making decision), internal rate of return (IRR) and payback period. The summary of key findings of net present value, internal rate of return (IRR), and payback period techniques between these two Networks are: Network (Appendix I) | I | II | NPV | $ 4,678,000 | $ 1,226,000 | IRR | 28.46% | 20.27% | Payback period | 4.1 years | 4.3 years | Annuity equivalent | $ 1,518,000

Finance Description

3207 words - 13 pages a given investment period. ARITHMETIC AVERAGE – the sum of returns in each period divided by the number of periods. GEOMETRIC AVERAGE – the single per-period return that gives the same cumulative performance as the sequence of actual returns. DOLLAR-WEIGHTED AVERAGE RETURN – the internal rate of return on an investment. SCENARIO ANALYSES – process of devising a list of possible economic scenarios and specifying the likelihood of each one, as

Mba Acct

469 words - 2 pages rejected because it offers a 10% rate of return and the cost of the funds needed to finance it is 11.16%. 5. If the projects differed substantially in risk, an alternative capital budget might be proposed. Also, it is possible that the firm would be unwilling to raise external equity capital (and thus dilute the ownership interest of current stockholders). 6. a. Cost of debt: ki = 11%(1 - 0.4) = 6.6% for the first $50 million ki

Finance Paper

2430 words - 10 pages minimum attractive rate of return (MARR) of 13% is evaluating four engineering projects. The internal rates of return (IRR) are as follows: |Project |IRR | |1 |12% | |2 |15% | |3 |14% | |4 |10% | The firm should a

Week 3 Discussion

491 words - 2 pages going bankrupt. Some techniques organizations due to ensure they have a good amount of working capital is ensuring they are paid on time (accounts receivable). In addition, it is also important they are paying their creditors on time. Last, it is important to invest any excess cash to maximize profitability. * What is capital planning? Why is the internal rate of return important to an organization? Why is net present value important to a

Finance Bonds

1242 words - 5 pages internal growth rate? A. 5.2632% B. 7.3333% C. 8.6956% D. 6.383% E. 9.1477% 11. Solving for Rates What annual rate of return is earned on a $5,000 investment when it grows to $7,000 in six years? Assuming annual compounding. A. 1.40% B. 5.45% C. 5.77% D. 4.00% E. 6.53% 12. Solving for Time How many years will it take $100 to grow to $1,000 with an annual interest rate of 8 percent? Assuming annual compounding. A. 9.00 years B. 10.00

The Four

288 words - 2 pages ), Dividends Payout= Cash Dividends/ Net Income ,Proportion of net income retained aka (the retention, or plowback, ratio) = Addition to Retained Earned/ Net Income, Internal Growth= (ROA * b)/ (1 – ROA * b), Sustainable growth rate= (SGR= (ROE * b)/ (1 – ROE * b) , Determinants of Growth= ROE= Profit margin * Total asset turnover * Equity multiplier, Single Cash Flow= PV= FV/ (1 + r), Present Values for Multiple Periods= Fv/ (1 + r), Present versus Future Value= FV = PV * FVIF (r, t), Present Value for Annuity Cash Flows= PV= C * PVIFA ( r, t) Future Value for Annuities= FVIFA ( r, t) = ((1 + r) – 1) /r = ( FVIF(r,t) – 1) /r A Note on Annuities Due = Perpetuities =

Hindu Rate Of Growth And Reform

587 words - 3 pages out. The fiscal deficit rose to a high value. Since these deficits had to be met by borrowings, the internal debt of the government accumulated rapidly. The foreign exchange reserves had dried up to the point that India could barely finance three weeks worth of Imports. In return for an IMF bailout, Gold bullion was transferred to London as collateral, the Rupee devalued and economic reforms were forced upon India. Industrial licensing was

Jet2 Task 3

5829 words - 24 pages should accept the project. If the results are negative, they should reject it. The internal rate of return (IRR) is often used as a companion to the NPV to assist management with investment decisions. In a discounted cash flow calculation, the IRR is the rate of interest that decreases future income to the cost of the investment (Bierman). The IRR should be equal to or higher than the cost of capital in order for the company to go ahead with the

Case Study 2

1656 words - 7 pages well as the return on their invested assets. They may change by different amounts. If interest rates change, the bank will have to reinvest the cash flows from assets or refinance rolled-over liabilities at a different interest rate in the future. An increase in rates, ceteris paribus, increases a bank’s interest income but also increases the bank’s interest expense. Static GAP Analysis considers the impact of changing rates on the bank’s net

Related Essays

Capital Budgeting Recommendation Essay

396 words - 2 pages to accept the project that adds the most value (such as the project with the higher NPV). Therefore, if considering Corporations A and B, you would accept both projects if they are independent, and you would only accept Corporation B if they are mutually exclusive. Internal Rate of Return (IRR) The internal rate of return is defined as the discount rate that equates the present value of a project's cash inflows to its outflows. In other words

Assignment 4 Fiscal Budget Project Analysis

291 words - 2 pages November 18, 2012 PAD 500 Inez Blair Assignment 3 The payback period for Option A is 7.9 years, well over the critical acceptance level of 2.75 years. The payback period for Option B is 5 years, which is a somewhat closer to the critical acceptance level. The net present value for Option A is $2,115,031.84 and the net value for Option B is $2,987,257.56. The internal rate of return for Project A is 24% while the internal rate of

Ccna Essay

1718 words - 7 pages techniques include 1. Present worth analysis, 2. Annual (periodic) worth analysis, 3. Future worth analysis, 4. Internal rate-of-return, 5. Benefit-cost ratio, and 6. Payback period method. Below is a discussion of each of these techniques. Present Worth (PW) Analysis Objective: To evaluate and compare mutually exclusive alternatives based on the equivalent netpresent worth of the lifecycle cash flows for each alternative at a

Financial Mgmt Practice Exam Essay

2707 words - 11 pages | 15. A project has an up-front cost of $100,000. The project's WACC is 12 percent and its net present value is $10,000. Which of the following statements is most correct? |a. |The project should be rejected since its return is less than the WACC. | |b. |The project's internal rate of return is greater than 12 percent. | |c. |The project's