Ch7 - Objectives 7 Comparing Alternatives: Rate of Return...

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Rate of Return Analysis Objectives • Evaluate cash flows by the internal rate of return (IRR) method • Plot present worth (PW) of a project against interest rate • Use an incremental rate of return analysis to evaluate competing alternatives Internal Rate of Return • Internal Rate of Return is defined as the interest paid on the unpaid balance of a loan such that the payment schedule makes the unpaid loan balance equal to zero when the final payment is made. • Internal Rate of Return is the interest earned on the unrecovered investment such that the payment schedule makes the unrecovered investment equal to zero at the end of the life of the investment. The Internal Rate of Return is the interest rate at which the benefits are equivalent to the cost , (or at which NPW=0) . Calculating Rate of Return Convert consequences into cash flow and solve this for unknown value of internal rate of return (IRR) using one of: • PW benefits – PW costs = 0 PW
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Ch7 - Objectives 7 Comparing Alternatives: Rate of Return...

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