The higher is the value of the IRR from your desired rate of return, the more attractive is the project.
What is internal rate of return (IRR)? The Internal rate of return is that return which is generated for each rupee invested in the project for a specific period. You can also say that it is the rate of return at which your net present value (NPV) of the project becomes zero. It is a discounted cash flow technique and a measure of the investment performance. Understanding the attractiveness
For example, there are two project with the following information:
The discount rate is the minimum return you are expecting from the project. Although, the project B has the higher IRR value than that of project A. But project A is more attractive than the project B. It is because you are getting 50% more of what you are expecting in project A while in the case of the project B, you are getting 33.33% more of what you are expecting.
The formula & the calculation
\(\frac{CF_1}{(1+IRR)^1}+\frac{CF_2}{(1+IRR)^2}+....+\frac{CF_n}{(1+IRR)^n)}  initial\ investment = 0\)
We will calculate the value of irr through hit and trial method:
The value Rs. 47367 > 0,
This is one of the simplest methods of calculating the IRR of the project. The advantages
The disadvantages
Conclusion:
When you have two feasible projects in your hand, do calculate their relative attractiveness in addition to their Internal rate of returns. A higher value of the attractiveness helps you in shortlisting the profitable project and you will benefit as an investor.
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March 2017
