Question

What is the difference between IRR and RADR ?

What does IRR-RADR = (-) value mean and IRR-RADR=(+) value mean as well ?

Answer 1

1. Internal rate of return is the rate of return at which cash outflows related to a project will be equal to cash inflows related at a project at the present value so it is basically the equivalent rate at which the cash outflows and cash inflows are equal to each other at the present value.

risk adjusted discount rate will be that discount rate which is specific in nature and which have considered the factors like risk before it has been calculated.

internal rate of return is directly related to weighted average cost of capital whereas risk adjusted discount rate will be related to adjustment of risk into the weighted average cost of capital.

Internal rate of return will not be considering risk into the discount rate whereas risk adjusted discount rate will be considering the discount rate while calculation.

Internal rate of return is a narrow concept whereas risk adjusted return is a wider concept and it is adopted for allocation of a specific rates.

2.when the internal rate of return is lower than risk adjusted rate of return it will mean that there is higher risk associated with the project and it should be discounted with higher rate and it will have a lower net present value.(IRR-RADR=-)

when the internal rate of return is higher than risk adjusted discount rate, it will mean that the project will be having a lower risk than the overall risk associated with the this project, & it will be highly favorable when considered with risk adjusted discount rate.(IRR-RADR=+)