Internal Rate of Return Method

# Internal Rate of Return Method - Internal Rate of Return...

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Internal Rate of Return Method The internal rate of return method differs from the net present value method in that it finds the interest yield of the potential investment . The internal rate of return (IRR) is the interest rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows. The determination of the internal rate of return involves two steps. Step 1. Compute the internal rate of return factor. The formula for this factor is: Illustration 23-27 Formula for internal rate of return factor The computation for the Tappan Company, assuming equal net annual cash flows, 2 is: Step 2. Use the factor and the present value of an annuity of 1 table to find the internal rate of return. Table 2 of Appendix C is used in this step. The internal rate of return is the discount factor that is closest to the internal rate of return factor for the time period covered by the net annual cash flows. For Tappan Company, the net annual cash flows are expected to continue for 10 years. Thus, it is

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## This note was uploaded on 11/08/2011 for the course ACCOUNTING ac 202 taught by Professor - during the Fall '11 term at Montgomery.

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Internal Rate of Return Method - Internal Rate of Return...

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