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Internal rate of return |
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Internal rate of returnThe interest rate which, when used as the discount rate for a series of cash flows, gives a net present value of zero.To understand this, remember the fundamental concept that £1 received in ten years is not worth as much as £1 received now, because £1 received now can be invested for ten years and compound into a higher amount.So if you are a project financier, and you are considering the viability of a project that requires up front capital expenditure, which will be recouped by net cash inflows in years 3, 4 and 5, you have to discount the earnings in those later years to establish their net present value. The discount you apply is the crucial thing, but the IRR gives you a starting point -it is the discount rate at which the project will break even.If you apply a discount rate to future cashflows that is higher than the IRR, the project will make a loss in real terms. If you apply a discount that is lower than the IRR, the project will be profitable.Similar MatchesInternally efficient marketInternally efficient marketSee: Operationally efficient market Internal growth rateInternal growth rateMaximum rate a firm can expand without outside sources of funding. Growth generated by cash flows retained by company. Internal measureInternal measureThe number of days that a firm can finance operations without additional cash income. Internal economies of scaleInternal economies of scaleEconomies of scale that are internal to a firm; that is, the firm's average costs fall as its own output rises. Likely to be inconsistent with perfect competition. Contrasts with external economies of scale. Internal expansionInternal expansionGrowth of assets resulting from internal financing or internally generated cash flow. Further SuggestionsIncremental internal rate of returnPortfolio internal rate of return Internal Revenue Code Internalize Internal Revenue Service (IRS) Internal Revenue Service Restructuring and Reform Act of 1998 Internal balance Internal finance Internal Revenue Service |
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