IRR - P2

Question 1

What is IRR?

Answer 1

Rate of return at which the project has a NPV of zero
Investment appraisal technique
Calculate the exact rate of return that the project is expected to achieve

Question 2

What is the decision criteria for IRR?

Answer 2

If IRR is greater that costs of capital, accept the project
If IRR is less than cost of capital, reject the project

Question 3

What are the advantages of IRR?

Answer 3

Considers the time value of money
Percentage and therefore easily understood
Uses cash flows not profits
Considers whole life of the project
Can be calculated when the cost of capital is unknown
If IRR exceeds the cost of capital this would normally increase shareholders wealth

Question 4

What are the difficulties with IRR?

Answer 4

Not a measure of absolute profitability
Interpolation only provides and estimate
Non-conventional cash flows may give rise to no IRR or multiple IRRs