capital budgeting INTERNALRATE OF RETURN notes
Internalrate of return (IRR) method is another discounted cash flow technique whichtakes account of the magnitude and timing of cash flows. Other terms used todescribe the IRR method are yield on an investment, marginal efficiency ofcapital, rate of return over cost, time-adjusted rate of internal return and soon.
Formulae:C1/C0 =1+r C0= C1/(1+r) , Where C0=Investment, C1= Time Period and r= Rate of Return.
Therate of return can be defined as that rate which equates investment outlay withthe present value of inflow received after one period.
Toaccept the project if its internal rate of return is higher than theopportunity cost of capital (r>k)
AcceptInvestment Proposal, if r>k
RejectInvestment Proposal, if r<k
MayAccept Investment Proposal, if r=k