What is Internal rate of return?
In short
The internal rate of return is the discount rate at which a project's net present value equals zero. A project is acceptable if its internal rate of return exceeds the required rate of return.
Key takeaways
- It assumes cash flows are reinvested at the internal rate of return itself.
- Projects with cash flows that change sign more than once can have several rates.
- For mutually exclusive projects, net present value is the better guide.
Where it's tested
BAR: Financial Forecasting, Budgeting & Valuation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A product sells for $80 with variable costs of $50 per unit. Fixed costs are $360,000. How many units must be sold to earn a target operating profit of $90,000?