irrvsn … r2the net present value B u s i n e s s F i n a n c e

irrvsn … r2the net present value B u s i n e s s F i n a n c e

Initial Response should be between 50-150 words.

R1

IRR stands for internal rate of return. When used, it estimates the profitability of potential investments using a percentage value rather than a dollar amount. It is also referred to as the discounted flow rate of return or the economic rate of return. It excludes outside factors such as capital costs and inflation. Unlike the IRR, a company’s NPV, or net present value, is expressed in a dollar figure. It is the difference between a company’s present value of cash inflows and its present value of cash outflows over a specific period of time.

Both IRR and NPV can be used to determine how desirable a project will be and whether it will add value to the company. While one uses a percentage, the other is expressed as a dollar figure. While some prefer using IRR as a measure of capital budgeting, it does come with problems because it doesn’t take into account changing factors such as different discount rates. In these cases, using the net present value would be more beneficial.

Palmer, B. (2020, September 16). Capital Budgeting: IRR or NPV? Retrieved November 16, 2020, from https://corporatefinanceinstitute.com/resources/kn…

Tuovila, A. (2020, September 20). Incremental Cash Flow. Retrieved November 16, 2020, from