Critique Internal Rate of Return and compare to Return on Assets, Investment, Capital, and defend best...

Critique Internal Rate of Return and compare to Return on Assets, Investment, Capital, and defend best practice in assessing overall financial performance.

Solutions

Expert Solution

The internal rate of return (IRR) calculates the minimum return that is required to be earned in a project so that it does not become non-profitable. In other words, internal rate of return is the minimum possible discount rate for the project and any discount rate below the IRR will make the project unattractive.

When we compare the IRR to return on assets and return on investment capital, the Return on assets and return on investment are better indicators of financial performance that the IRR. The IRR just confirms if the project is profitable or not, it does not comment on what the degree of profitability. However, the return on assets and the return on invested capital actually measure the return that is obtained by deploying the assets and the capital. So in conclusion, IRR is an indicator or financial performance or non-performance, whereas Return on assets and investment capital are measurements of financial performance.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Find Internal rate of return of the investment opportunity

Royal Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $16,200,000; it will enable the company to increase its annual cash inflow by $5,000,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $32,400,000; it will enable the company to increase annual cash flow by $7,500,000 per year. This...

If an investment is producing an internal rate of return that is equal to the required...

If an investment is producing an internal rate of return that is equal to the required return, the Net Present Value of the project will be ______ and the Profitability Index of the project will be ______.

The internal rate of return is unreliable as an indicator of whether or not an investment...

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? Multiple Choice a.One of the time periods within the investment period has a cash flow equal to zero. b.The initial cash flow is negative. c.The investment has cash inflows that occur after the required payback period. d.The investment is mutually exclusive with another investment of a different size. e.The cash flows are conventional.

The internal rate of return for an investment with contributions of $3,000 at time 0 and...

The internal rate of return for an investment with contributions of $3,000 at time 0 and $1,000 at time 1 and returns of $2,000 at time 1 and $4,000 at time 2 can be expressed as 1/ n . Find n.

The internal rate of return represents the rate of interest that recovers the initial investment outlay....

The internal rate of return represents the rate of interest that recovers the initial investment outlay. Discuss the validity of this statement. paragraph answer:

If you compare the internal rate of return to the net present value, the IRR is...

If you compare the internal rate of return to the net present value, the IRR is more reliable when you are evaluating mutually exclusive projects. the IRR is easier to apply when the cash flows are non-normal. they are very similar because the IRR is the discount rate that makes the NPV equal to one. will provide the same accept or reject answer unless you have scale differences between projects. will provide the same accept or reject answer if you...

What is the internal rate of return (IRR) on an investment with the following cash flows?...

What is the internal rate of return (IRR) on an investment with the following cash flows? Holding period 5 years. Round your answer to nearest 0.25%. Please show work (NO EXCEL) Year Net Income Purchase Price $4,000,000 1 $250,000 2 $300,000 3 $350,000 4 $400,000 5 $450,000 Resale $4,750,000 (net of costs)

Internal rate of return and net present value are related in that: Internal rate of return...

Internal rate of return and net present value are related in that: Internal rate of return formed the basis for the eventual development of the net present value theory. Internal rate of return finds a discount rate that produces a net present value of zero. Net present value formed the basis for the eventual development of the internal rate of return theory. Net present value can only be used to evaluate irregular cash flows, whereas internal rate of return can...

Discuss the differences between return on investment captial method (RIC) and modified internal rate of return...

Discuss the differences between return on investment captial method (RIC) and modified internal rate of return (MIRR) method? In addition, list other methods for project analyze with various rate options for economic analysis studies.

Calculator Internal Rate of Return Method The internal rate of return method is used by King...

Calculator Internal Rate of Return Method The internal rate of return method is used by King Bros. Construction Co. in analyzing a capital expenditure proposal that involves an investment of $73,600 and annual net cash flows of $10,000 for each of the 10 years of its useful life. Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83321.8331.7361.6901.6261.52832.6732.4872.4022.2832.10643.4653.1703.0372.8552.58954.2123.7913.6053.3522.99164.9174.3554.1113.7843.32675.5824.8684.5644.1603.60586.2105.3354.9684.4873.83796.8025.7595.3284.7724.031107.3606.1455.6505.0194.192 a. Determine a present value factor for an annuity of $1 which can be used in determining the internal rate of return....

Subjects