finance lec 3 - irr

Question 1

what is IRR

Answer 1

Yield eanrt on an investmetn over teh course of its ecnomic life

Question 2

what is IRR equivalent to

Answer 2

discount rate that will cause teh NPV of investment ot be 0

Question 3

NPV of 0 means

Answer 3

not making or loosing any money

Question 4

descision rule for IRR

Answer 4

accept project if IRR on investmentis greater than or equal to required ROR /COST OF CAPITAL/ TARGET REQUIRED RATE/ MIN REQUIRED RATE

Accept project w highest IRR

Question 5

IRR calculation

Answer 5

r1+

NPV 1
________

NPV 1 - NPV2 (really adding together )

*

(R2-R1)

Question 6

R1=

Answer 6

Discount rate giving you +ve NPV 1

Question 7

R2 =

Answer 7

Discount rate giving you negative NPV 2

Question 8

NPV1

Answer 8

Positive NPV obtainied by applying discount rate of r1

Question 9

NPV 2

Answer 9

negative NPV obtained by appling discount rate of r2

Question 10

when you find positive NPV HOW DO YOU FIND NEGATIVE NPV

Answer 10

INCREASE RATE BY INCREMENT OF 5% - 10%

Question 11

+VE OF IRR

Answer 11

takes into account time vale of money

takes all cashflows into consideration

doesnt use accountign profit so it is robust

Question 12

-ve IRR

Answer 12

Relative measure and so ignores absolute pay off
- so we dont really know the finaical value fo the %

can get multiple or indeterminate IRRS so this is confusoing

Logic of IRR may be difficult to satisfy and explain to non inancila manager

Question 13

what is the best investment apprasial technique

Answer 13

NPV