- This topic has 3 replies, 2 voices, and was last updated 11 years ago by
.
-
Posts
-
Hello
i have a question relating to internal rate of return. The textbook defines irr as the discount rate at which npv is zero but what does this mean>? nad can you explain the reasoning behind it with an illustration if possible. ThxWe accept projects that give a positive NPV and we reject projects that give a negative NPV.
If we know the rate at which the NPV is zero (the IRR) then we know that if the cost of capital is less than the IRR then the NPV will be positive and we should accept. If the cost of capital is more than the IRR then we know the NPV will be negative and we should reject.
For a full explanation and example you really should watch the free F9 lecture on this (and/or the free F2 lecture, because IRR is assumed knowledge from F2)
ok thx ill watch it.
If i understood correctly what you said ,suppose we have a wacc of 10% which gives an NPV of 200k, then if we have an irr of 14% for that project and we use that same 14% as the new wacc and discount rate in the npv calculation all over again the result is supposed to be zero?
- You must be logged in to reply to this topic.